ADDL CIT RG 25(3), MUMBAI V. XERXES RAO, MUMBAI

ITA 5635/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8773 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 12-09-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 12-07-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NAVEEN GUPTA
• Keywords: Deemed dividend
• Section: 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL G BENCH: MUMBAI BEFORE SHRI P.M. JAGTAP, ACCOUTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. 5635/MUM/2010 (ASSESSMENT YEAR: 2007-08) ACIT, CIR.-25(3), C-11, R. NO.308, PRATYAKSH KAR BHAVAN, BANDRA KURLA COMPLEX, BANDRA (EAST), MUMBAI -400 101 VS SHRI XERXES RAO, BL-7, JAI BONANZA INDUSTRIAL ESTATE, ASHOK CHAKRAVARTHY ROAD, KANDIVLI (EAST), MUMBAI -400 101 PAN: AADPR 8519 G APPELLANT RESPONDENT APPELLANT BY : SHRI NAVEEN GUPTA RESPONDENT BY : SHRI DHARMESH SHAH DATE OF HEARING : 12.09.2012 DATE OF PRONOUNCEMENT : 26.09.2012 O R D E R PER VIVEK VARMA, JM: THE INSTANT APPEAL IS FILED BY THE DEPARTMENT AGAIN ST THE ORDER OF CIT(A) 35, MUMBAI, DATED 22.04.2010, WHEREIN THE SO LITARY ISSUE IS WITH REGARD TO THE APPLICABILITY OF THE PROVISIONS OF SE CTION 2(22)(E) OF THE INCOME TAX ACT. 2. DURING THE COURSE OF ASSESSMENT PROCEEDING, AO N OTICED THAT THE ASSESSEE WAS A RECIPIENT OF RS 1,30,24,936 FROM M/S JAY PRECISION PRODUCTS (P) LTD. IN WHICH THE ASSESSEE IS A DIRECTOR. THE A O, ASKED THE ASSESSEE, AS TO WHY PROVISIONS OF SECTION 2(22)(E) BE NOT INVOKE D. THE ASSESSEE, VIDE LETTER DATED 21.11.2009, INFORMED THE AO, THAT THE APPELLANT AND HIS WIFE WERE HOLDING 50% OF THE SHARES EACH BEFORE 02.01.2005 AND AFTER 02.01.2005 THE SHARE HOLDING O F THE COMPANY WAS CHANGED AS UNDER: M/S. GREAVES LEASING FINANCE LIMITED ITA NO. 6356/MUM/2011 2 S. NO. NAME OF SHAREHOLDER NO. OF SHARES AS ON INCORPORATION @ OF SHARE- HOLDING AS ON INCORPORATION NO. OF SHARES AFTER 01.01.2005 % SHAREHOLDING AFTER 02.01.2005 1 XERXES K. RAO 5000 50% 990 9.90% 2 SMITA X. RAO 5000 50% 3010 30.10% 3 ZENPBIA X. RAO NIL NIL 3000 30.00% 4 ZUBIN X. RAO NIL NIL 3000 30.00% THE APPELLANT CONTENDED THAT HE IS NOT THE BENEFICI AL OWNER OF SHARES OF HIS MINOR CHILDREN AND, THEREFORE, SECTION 2(22)(E) IS NOT APPLICABLE AS HIS SHARE HOLDING IS ONLY 9.90%. THE APPELLANT RELIED ON THE DECISION OF HONBLE MUMBAI SPECIAL BENCH IN THE CASE OF M/S BHAUMIK COLOUR PVT . (120 TTJ 865) IN WHICH IT WAS HELD THAT FOR APPLYING SECTION 2(22)(E), THE SHAREHOLDER SHOULD BE BOTH REGISTERED AND BENEFICIAL SHARE HOLDER HAVING MORE THAN 10% OF THE VOTING POWER. THE APPELLANT FURTHER RELIED ON THE DECISION OF HONBLE MUMBAI TRIBUNAL IN THE CASE OF ITO VS. S.S. BARODAWALA (4 ITD 186) IN WHICH IT WAS HELD THAT FATHER CANNOT BE HELD TO BE THE BENEFICIAL OWNER OF THE SHARES HELD IN THE NAME OF MINOR CHILDREN. 3. THE AO, DID NOT ACCEPT THE CONTENTIONS OF THE AS SESSEE AND HELD THAT THE ASSESSEE AND HIS WIFE, BOTH WERE REGISTERED AND BENEFICIAL OWNERS OF SHARES EXCEEDING 50%, ON BEHALF OF THE MINOR CHILDR EN. THE AO, THEREFORE, INVOKED THE PROVISIONS OF SECTION 2(22)(E) AND ADDE D RS. 74,24,936 TO THE INCOME OF THE ASSESSEE. 4. AGGRIEVED, THE ASSESSEE PREFERRED THE APPEAL BEF ORE THE CIT (A), BEFORE WHOM, THE ASSESSEE REITERATED HIS CONTENTIONS AND S UBMITTED ..THE REPRESENTATIVE SUBMITTED THAT THE APPELLANT. WAS HOLDING ONLY 9.90% OF SHARES AND THE MINOR CHILDREN I.E MISS. ZE NOBIA X. RAO AND MASTER ZUBIN X. RAO WERE HOLDING SHARES @30% EACH I N THE COMPANY. IT WAS SUBMITTED THAT THE MINORS HOLDING CANNOT BE CLUBBED WITH THE HOLDING OF THE GUARDIAN FOR THE PURPOSE OF DETERMIN ING THE APPLICABILITY OF SECTION 2(22)(E) OF THE ACT. IT WAS SUBMITTED TH AT THE LANGUAGE OF SECTION 2(22)(E) CLEARLY SHOWS THAT THE REQUIREMENT UNDER THE LAW IS NOT MERELY A SHAREHOLDER OF THE COMPANY, BUT ALSO THE S HAREHOLDER WHO IS THE BENEFICIAL OWNER OF THE SHARES. HENCE, SECTION 2(22)(E) WOULD BE ATTRACTED ONLY IN A CASE WHEN THE ASSESSEE IS REGIS TERED AS WELL AS BENEFICIAL SHAREHOLDER OF THE SHARES. IT WAS ARGUED BY THE REPRESENTATIVE THAT IN THE PRESENT CASE, THE A.O. H IMSELF ACCEPTED THAT THE SHORES TO THE TUNE OF 9.90% WERE HELD BY THE AP PELLANT AND 60% OF THE HOLDING WAS THAT OF THE MINORS. IT WAS FURTHER SUBMITTED THAT EVEN ACCORDING TO THE ASSESSING OFFICER, THE APPELLANT W AS SHAREHOLDER ON BEHALF OF THE MINORS WHICH GO TO PROVE THAT THE MIN ORS WERE THE ACTUAL BENEFICIAL SHARE HOLDERS. THE REPRESENTATIVE ALSO P LACED RELIANCE ON THE TRANSFER FORMS AND THE EXTRACT OF REGISTER OF THE M EMBERS TO SUPPORT THE CASE THAT THE MINORS WERE THE BENEFICIAL OWNER OF T HE SHARES. FURTHER M/S. GREAVES LEASING FINANCE LIMITED ITA NO. 6356/MUM/2011 3 RELIANCE WAS ALSO PLACED ON THE CIRCULAR NO.495 DAT ED 22.09.1987 AND THE DECISIONS IN THE FOLLOWING CASES. Q) ITO VS. S.S. BARODAWALA :[4 ITD 186(BOM)J B) ITO V. SMT. S. PARVATHAVARDHINI AMMAL :[24 ITD 243 (COCHIN)] C) MRS. MINNIE R. CAMA V. ITO :[17 ITD 139(AHD.)J D) ACIT V. SANJIV R. MEHTA :[149 ITD 382 (MUM)] E) SMT. GUNVANTI R. MEHTA V. ITO :[145 ITD 382 (M UM)] F) DCIT VS. NATIONAL TRAVEL SERVICES :[31 SOT 76 (DEL)] G) ACIT V. BHAUMIK COLOUR (P) LTD. :[118 ITD 1 (M UM.) (SB)/ :[313ITR(AT)146(MUM)(SB) 5. THE CIT (A), ON RECEIPT OF THE SUBMISSIONS, HELD (AS EXTRACTED) : ACCORDING TO SECTION 2(22)(E), ANY PAYMENT BY A COM PANY BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER BEING A PER SON WHO IS THE BENEFICIAL OWNER OF THE SHARES HOLDING NOT LESS THAN 10% OF THE VOTING POWER, SHALL BE TAXED AS INCOME IN THE H ANDS OF SUCH SHAREHOLDER. THUS, THE LANGUAGE THE SHAREHOLDER, B EING A PERSON WHO IS THE BENEFICIAL OWNER OF THE SHARES S UGGESTS THAT THE REQUIREMENT UNDER THE LAW IS NOT MERELY A SHARE HOLDER OF A COMPANY, BUT SHAREHOLDER WHO IS ALSO THE BENEFICIAL OWNER OF THE SHARES. ACCORDING TO CIRCULAR NO. 495 DATED 22. 09.1987 [168 ITR (ST.) 87], THE SHAREHOLDER NEED NOT BE ONL Y A REGISTERED SHAREHOLDER, BUT ALSO THE BENEFICIAL OWNER OF SHARE S. HE FURTHER HELD , IN THE CASE OF ITO V. S.S. BARODAWALA [4 ITD 186 (BCM)/ITO VS SMT. S. PARVATHAVARDHINI [24 ITD 243 (COCHIN)/MRS. MINNIE CAMA V. ITO [17 ITD 139 (AHD.) /ACIT V. SANJIV MEHRA [149 TAXMAN (MAG.) 40 (ASR.). THE RELE VANT PARA OF THE SAID DECISION IN THE CASE OF S S BARODAWALA IS REPRODUCED BELOW: 8. BEFORE US, IT WAS CONTENDED BY THE LEARNED DEPA RTMENTAL REPRESENTATIVE THAT THE ASSESSEE IS HAVING VOTING C ONTROL NOT ONLY WITH REGARD TO THE SHARES OWNED BY HIM BUT ALS O WITH REGARD TO THE SHORES STANDING IN THE NAME OF THE MI NOR SONS, THAT HE SHOULD, THEREFORE, BE DEEMED TO BE THE BENE FICIAL OWNER OF THE SHARES AND THAT HE WILL, THUS, HAVE MORE THA N 20 PER CENT OF THE VOTING POWER. IN THIS CONNECTION, THE LEARNE D DEPARTMENT REPRESENTATIVE ALSO RELIED UPON PAGE 69 OF KANGA AN D PALKHIVALAS LAW AND PRACTICE OF INCOME-TAX, WHEREI N IT IS STATED THUS: BENEFICIAL OWNERSHIP AND NOT LEGAL OW NER SHIP, OF SHARES IS THE CRITERION. THUS, THE REGISTERED HOLDE R OF EVEN THE MAJORITY OF EQUITY SHARES WOULD NOT FALL WITHIN THI S DEFINITION IF HE HAS NO BENEFICIAL INTEREST IN THE SHORES; AND CO NVERSELY, A PERSON WHO IS BENEFICIALLY ENTITLED TO 20 PER CENT OR MORE THE EQUITY CAPITOL WOULD BE COVERED BY THIS DEFINITION EVER IF HE IS NOT THE REGISTERED HOLDER OF ANY SHARES. THIS PASS AGE, IN OUR VIEW, DOES NOT HELP THE DEPARTMENT, BECAUSE IT ONLY POINTS OUT THAT WHAT IS IMPORTANT IS NOT THE NAME IN WHICH THE SHORES ARE REGISTERED, BUT THE BENEFICIAL INTEREST THEREIN. TH IS PROPOSITION IS NOT DISPUTED BY THE ASSESSEE. THE ONLY POINT OF CON TROVERSY IS M/S. GREAVES LEASING FINANCE LIMITED ITA NO. 6356/MUM/2011 4 WHETHER THE ASSESSEE CAN BE SAID TO BE THE BENEFICI AL OWNER OF THE SHORES STANDING IN THE NAME OF HIS MINOR SONS. AS STATED EARLIER, THE SHARES HAD COME TO THE MINORS BY TRANS FER. THIS DOES NOT SEEM TO BE MATERIAL BECAUSE THE QUESTION M ENTIONED ABOVE WILL STILL REMAIN EVEN IF THE SHARES WERE GIF TED BY THE ASSESSEE HIMSELF TO HIS MINOR SONS. A FATHER AS GUA RDIAN MAY MANAGE THE AFFAIRS WITH REGARD TO THE SHARES STANDI NG IN THE NAME OF HIS MINOR SONS, BUT THIS WILL NOT MAKE HIM THE BENEFICIAL OWNER OF THE SHARES. TO MAKE HIM A BENEF ICIAL OWNER, BENEFIT OR ADVANTAGE ARISING OUT OF THE SHARES MUST ACCRUE TO HIM. IN THE PRESENT CASE, THE SHARES BELONG TO THE MINORS AND THE BENEFIT ARISING OUT OF THE SAME ACCRUES ONLY TO THE MINORS. BY MANAGING THE SHARES AS THE GUARDIAN, IT CANNOT B E SAID THAT THE FATHER WILL BECOME THE BENEFICIAL OWNER OF THE SHARES. WE ARE IN FULL AGREEMENT WITH THE VIEW EXPRESSED BY TH E COMMISSIONER (APPEALS) THAT THE ASSESSEE CANNOT BE SAID TO BE THE BENEFICIAL OWNER OF THE SHARES. IN THIS CONNECT ION, THE LEARNED COUNSEL FOR THE ASSESSEE ALSO DREW OUR ATTE NTION TO EXPLANATION 2 TO SECTION 64 OF THE ACT, WHICH RELAT ES TO THE CLUBBING OF THE INCOME OF SPOUSE, MINOR CHILD, ETC. CLAUSE (II) OF SUB-SECTION (1) OF SECTION 64 ALSO REEFERS TO AN IN DIVIDUAL WHO HAS A SUBSTANTIAL INTEREST IN A CONCERN. IN THIS CO NTEXT, EXPLANATION 2, AMONG OTHER THING, PROVIDES THAT A P ERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL INTEREST IN A COMPA NY IF ITS SHARES CARRYING NO LESS THAN 20 PER CENT OF THE VOT ING POWER, ARE AT ANY TIME DURING THE PREVIOUS YEAR OWNED BENE FICIALLY BY SUCH PERSON AND PARTLY BY ONE OR MORE OF HIS RELATI VES. THIS WILL INDICATE THAT OWNING BENEFICIAL INTEREST IS DIFFERE NT FROM THE OWNERSHIP OF SHARES BY RELATIVES AND THAT WHERE THE LEGISLATURE INTENDED THAT THE SHARES HELD BY RELATIVES SHOULD A LSO BE RECKONED FOR THE PURPOSE OF DETERMINING WHETHER A P ERSON HAS SUBSTANTIAL INTEREST IN A COMPANY, IT HAS BEEN SPEC IFICALLY PROVIDED FOR. WE, THEREFORE, HOLD THAT THE ASSESSEE CANNOT BE SAID TO BE THE BENEFICIAL OWNER OF THE SHARES STAND ING IN THE NAME OF HIS MINOR SONS AND THAT THE AMOUNT STANDING TO THE DEBIT OF THE ASSESSEE IN THE ACCOUNTS OF THE COMPAN Y CANNOT BE DEEMED TO BE DIVIDEND UNDER SECTION 2(22)(E) EVEN THE HONBLE SPECIAL BENCH IN THE CASE OF ACIT V. BHAUMIK COLOUR (P) LTD. [313. ITR (AT) 146 (MUM)(SB) HAS CA TEGORICALLY HELD AS UNDER: IN THE LIGHT OF THE ABOVE DISCUSSION, THE QUESTION S REFERRED TO THE SPECIAL BENCH ARE ANSWERED AS FOLLOWS: ON THE FIRST QUESTION: DEEMED DIVIDEND CAN BE ASSES SED ONLY IN THE HANDS OF A PERSON WHO IS A SHAREHOLDER OF THE L ENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER. ON THE SECOND QUESTION: THE EXPRESSION SHAREHOLDER REFERRED TO IN S. 2(22)(E) REFERS TO BOTH A REGISTERED SHARE HOLDER AND BENEFICIAL SHAREHOLDER, IF A PERSON IS A REGISTERED SHAREHOLDER BUT NOT THE BENEFICIAL SHAREHOLDER THEN THE PROVISI ONS OF S. 2(22)(E) WILL NOT APPLY. SIMILARLY, IF A PERSON IS A BENEFICIAL M/S. GREAVES LEASING FINANCE LIMITED ITA NO. 6356/MUM/2011 5 SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN A LSO THE PROVISIONS OF S. 2(22)(E) WILL NOT APPLY. IN VIEW OF THE SEVERAL DECISIONS CITED ABOVE AND TH E DECISION OF SPECIAL BENCH, THE APPELLANTS CASE IS SQUARELY COV ERED BY THE ABOVE DECISIONS RELIED ON BY THE AR. 6. THE CIT (A), THUS DELETED THE ADDITION, MADE BY THE AO. 7. IT IS AGAINST THIS ORDER, THE DEPARTMENT IS IN A PPEAL BEFORE THE ITAT. 8. BEFORE US, THE DR RELIED HEAVILY ON THE OBSERVAT ION OF THE AO AND PLEADED STRENUOUSLY TO SUSTAIN THE ADDITION MADE BY THE AO. 9. ON THE OTHER HAND, THE AR PLEADED THAT THE CASE IS SQUARELY COVERED BY THE DECISIONS MENTIONED IN THE SUBMISSIONS MADE AND SPECIALLY CITED THE CASE OF ITO VS S.S. BARODAWALA, REPORTED IN 4 ITD 1 86 (BOM) WHEREIN IDENTICAL CIRCUMSTANCE WAS DECIDED AND ALSO PLACED RELIANCE ON THE SPECIAL BENCH DECISION IN THE CASE OF ACIT VS BHAUMIK COLOU R (P) LTD. THE AR, THUS, PLEADED THAT THE DECISION TAKEN BY THE CIT (A) IS W ELL FOUNDED AND IN ACCORDANCE WITH LAW. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND ALSO PE RUSED THE ORDERS OF THE REVENUE AUTHORITIES. IT IS IMPERATIVE THAT WE LOOK INTO THE EXACT WORDS USED IN THE PROVISION, WHICH ARE, SECTION 2(22)(E) : ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WH ICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WH ETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF ADV ANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BE NEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIX ED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICI PATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBE R OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN)] OR AN Y PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL B ENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE CO MPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS. M/S. GREAVES LEASING FINANCE LIMITED ITA NO. 6356/MUM/2011 6 11. FROM THE PLAIN READING OF THE RELEVANT SECTION, IT IS ABUNDANTLY CLEAR THAT THE PROVISION SHALL GET TRIGGERED ONLY IF: A) RECIPIENT IS A REGISTERED AND BENEFICIAL OWNER OF SHARES; (BOTH INCLUSIVE) B) HOLDING NOT LESS THEN 10% OF THE VOTING RIGHTS. (WE ARE NOT CONCERNED WITH OTHER CONDITIONS AT PRES ENT) IN THE CIRCUMSTANCES AT HAND, WE FIND THAT THE ASSE SSEE IS NEITHER THE BENEFICIAL OWNER NOR HOLDING 10% OF THE VOTING RIGHTS, THEREFORE, ON TH E FACE OF CIRCUMSTANCES, THE PROVISIONS OF SECTION 2(22)(E ) CANNOT BE TRIGGERED ON THE ASSESSEE. 12. WE HAVE ALSO REFERRED TO THE CASE LAWS RELIED U PON BY THE ASSESSEE AND THE CIT(A), TO DECIDE THE ISSUE IN FAVOUR OF THE AS SESSEE. 13. READING THE CASE LAWS CONJOINTLY, WITH THE RELE VANT SECTION, WE ARE OF THE CONSIDERED OPINION, THAT PROVISIONS CANNOT BE T RIGGERED IN THE PRESENT SET OF CIRCUMSTANCES, AND WE, THEREFORE, SUSTAIN TH E DECISION OF THE CIT(A). 14. IN THE RESULT, THE APPEAL FILED BY THE DEPARTME NT IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 2 6 TH SEPTEMBER, 2012. SD/- SD/- (P.M. JAGTAP) ACCOUTANT MEMBER (VIVEK VARMA) JUDICIAL MEMBER MUMBAI, DATE: 26 TH SEPTEMBER, 2012 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)-35, MUMBAI. 4) THE CIT -25, MUMBAI, 5) THE D.R. G BENCH, MUMBAI. M/S. GREAVES LEASING FINANCE LIMITED ITA NO. 6356/MUM/2011 7 6) COPY TO GUARD FILE. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T., MUMBAI *CHAVAN