M/s Makhija Construction Company, Indore V. The Assitant Commissioner of Income Tax 3(1), Indore

ITA 577/IND/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53950 (ITAT-INDORE)
• Duration Of Justice: 1 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2007-2008
• Appeal Filed On: 03-09-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARUN DEWAN
• Assessee Lawyers: ANIL K GARG
• Keywords: Deemed dividend
• Section: 143(3)

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH, INDORE BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI R.C. SHARMA, ACCOUNTANT MEMBER ITA NO.577/IND/2010 A.Y. 2007-08 M/S. MAKHIJA CONSTRUCTION COMPANY, INDORE PAN AAGFM 6604 G ... APPELLANT VS ACIT-3(1), INDORE ... RESPONDENT APPELLANT BY : SHRI ANIL K. GARG, CA DEPARTMENT BY : SHRI ARUN DEWAN, SR. DR DATE OF HEARING : 10.10.2011 DATE OF PRONOUNCEMENT : 10.10.2011 O R D E R PER JOGINDER SINGH BY WAY OF THIS APPEAL THE ASSESSEE IS BEFORE US ON THE FOLLOWING GROUNDS: 2 1. THAT, THE LD. CIT(A) ERRED, BOTH ON FACTS AND IN LAW, IN CONFIRMING THE ORDER OF ASSESSMENT PASSED U/S 143(3) OF THE I.T. ACT, 1961 BY THE ACIT-3(1), INDORE. 2A). THAT, THE LD. CIT(A) ERRED, BOTH ON FACTS AND IN LAW, IN CONFIRMING THE ADDITION OF RS.11,89,050/- MADE BY THE LD. ASSESSING OFFICER, BY INVOKING PROVISIONS OF SECTION 2(22)(E) OF THE I.T. ACT, 1961. (B) THAT, THE LD. CIT(A) GROSSLY ERRED IN NOT CONSIDERING THE MATERIAL FACT THAT THE APPELLANT WAS NEITHER A REGISTERED SHAREHOLDER NOR A BENEFICIAL SHAREHOLDER OF M/S. MAKHIJA PROJECTS PVT. LTD. AND THEREFORE THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT WERE NOT APPLICABLE IN THE INSTANT CASE. (C) THAT WITHOUT PREJUDICE TO THE ABOVE, THE LD. CIT(A) GROSSLY ERRED IN CONFIRMING THE IMPUGNED ADDITION WITHOUT CONSIDERING THE MATERIAL FACT THAT THE PAYMENTS ERRED BY THE APPELLANT COMPANY FROM M/S. MAKHIJA PROJECTS PVT. LTD. WERE NOT IN THE NATURE OF ADVANCE OR LOAN AND THEREFORE, THE PROVISIONS OF SECTION 2(22)(E) WERE NOT APPLICABLE FOR THE SUBJECT TRANSACTIONS. 3A) THAT, THE LD. CIT(A) GROSSLY ERRED, BOTH ON FACTS AND IN LAW, IN CONFIRMING THE ADDITION OF RS.88,134/-, MADE BY THE LD. ASSESSING OFFICER, BY MAKING DISALLOWANCE OUT OF PETROL EXPENSES CLAIMED BY THE APPELLANT. B) THAT WITHOUT PREJUDICE TO THE ABOVE, THE LD. CIT(A) GROSSLY ERRED IN CONFIRMING THE IMPUGNED ADDITION WITHOUT CONSIDERING THE MATERIAL FACT THAT THE ENTIRE PETROL EXPENSES WERE INCURRED BY THE APPELLANT FIRM WHOLLY AND 3 EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS ONLY AND THEREFORE, THERE WAS NO JUSTIFICATION FOR LD. ASSESSING OFFICER IN MAKING THE ADHOC DISALLOWANCE MERELY ON GUESS WORK, CONJECTURES AND SURMISES. 2. DURING HEARING, WE HAVE HEARD SHRI ANIL KAMAL GA RG, LD. COUNSEL FOR ASSESSEE AND SHRI ARUN DEWAN, LD. SR. D R. FIRST GROUND AS REPRODUCED HEREINABOVE IS GENERAL IN NATU RE AND WAS ALSO NOT ARGUED BY THE LD. COUNSEL FOR ASSESSEE , THEREFORE, DISMISSED AS SUCH. 3. THE SECOND GROUND NO. 2(A) TO 2(C) IS WITH REGAR D TO CONFIRMING THE ADDITION OF RS.11,89,050/- MADE BY T HE ASSESSING OFFICER BY INVOKING PROVISIONS OF SECTION 2(22)(E) OF THE I.T. ACT, 1961. THE LD. COUNSEL FOR ASSESSEE SU BMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THIS INDORE TRIBUNAL IN THE CASE OF M/S. AGNI EN GINEERS VS. ACIT, (2011) 17 ITJ 38 (TRIBUNAL). ON THE OTHER HAN D, THE LD. SR. DR RELIED UPON THE ORDER OF LD. CIT(A). 3. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL AVAILABLE ON RECORD. BRIEF FACTS ARE T HAT THE 4 ASSESSEE IS A CIVIL CONTRACTOR BORROWED RS.11,89,50 0/- FROM MAKHIJA PROJECTS PVT. LTD. THE ASSESSING OFFICER TR EATED THE AMOUNT OF LOAN AS DEEMED DIVIDEND U/S 2(22)(E) OF T HE ACT. THE CONTENTION OF THE ASSESSEE IS THAT THE AFORESAID PR OVISION IS NOT APPLICABLE TO THE FACTS AS THE LOAN WAS TAKEN FOR T HE BENEFIT OF THE SHAREHOLDERS AND PLACED RELIANCE UPON THE DECIS ION FROM HONBLE APEX COURT IN THE CASE OF CIT VS. MUKUND RA Y K. SHAH (8 ITJ 601). SHRI PURSHOTTAM MAKHIJA, PARTNER OF TH E ASSESSEE FIRM IS HOLDER OF ITS 25% SHARES. HE HELD 69100 SHA RES OUT OF 1 LAC SHARES IN M/S. MAKHIJA PROJECTS PVT. LTD., THUS , HIS SHAREHOLDING WAS 69.10% IN M/S. MAKHIJA PROJECTS PV T. LTD. THE LD. ASSESSING OFFICER WAS OF THE VIEW THAT M/S. MAKHIJA PROJECTS PVT. LTD. ADVANCED LOAN TO ASSESSEE FIRM O UT OF ITS ACCUMULATED PROFIT AND ALSO THAT LENDING OF MONEY W AS NOT THE PART OF THE BUSINESS OF THIS COMPANY, CONSEQUENTLY, HE TREATED THE LOAN AMOUNT AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. ON APPEAL, THE LD. CIT(A) AFFIRMED THE STAND OF THE LD. ASSESSING OFFICER WHICH IS UNDER CHALLENGE BEFORE T HIS TRIBUNAL. NOW QUESTION ARISES WHETHER THE LOAN, SO RECEIVED, ATTRACTS 5 SECTION 2(22)(E) OF THE ACT. THE CASE OF THE ASSES SEE IS SQUARELY COVERED BY THE DECISION OF BHOUMIK COLOUR P. LTD. (2009) 313 ITR (AT) 146 (MUM) (SB). THE ASSESSEE MU ST BE BOTH REGISTERED AS WELL AS BENEFICIAL SHAREHOLDER O F THE COMPANY FROM WHOM LOAN IS RECIEVED. BEFORE US, IT I S A CASE OF A PARTNERSHIP FIRM WHICH IS NOT A SHAREHOLDER RATHE R SHRI PURSHOTTAM MAKHIJA WHO IS A PARTNER OF ASSESSEE FI RM IS SHAREHOLDER OF THE COMPANY FROM WHOM LOAN WAS RECEI VED. TO ATTRACT THE PROVISIONS OF SECTION 2(22)(E), THE PAY MENT MUST BE TO A PERSON WHO IS REGISTERED HOLDER OF SHARES. IN THE I.T. ACT, 1961, THE WORD SHAREHOLDER IN SECTION 2(22)(E) IS FOLLOWED BY THE WORDS BEING A PERSON WHO IS A BENEFICIAL OWNER OF SHARES. THIS EXPRESSION ONLY QUALIFIES THE WORD SHAREHOLDE R AND DOES NOT IN ANY WAY ALTER THE POSITION THAT THE SHAREHOL DER HAS TO BE A REGISTERED HOLDER NOT SUBSTITUTES THE REQUIREMENT OF MERELY HOLDING A BENEFICIAL INTEREST IN SHARES WITHOUT BEI NG A REGISTERED HOLDER OF SHARES. IF A PERSON IS A REGISTERED SHARE HOLDER BUT NOT THE BENEFICIAL SHAREHOLDER THEN THE PROVISIONS OF S ECTION 2(22)(E) WILL NOT APPLY. SIMILARLY, IF A PERSON IS A BENEFICIAL 6 SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN A LSO THE FIRST LIMB OF PROVISION OF SECTION 2(22)(E) WILL NOT APPL Y. THE PROVISIONS OF SECTION 2(22)(E) AS AMENDED BY FINANC E ACT, 1997 W.E.F. 1.4.98, DO NOT SAY IN WHOSE HANDS THE D IVIDEND HAS TO BE BROUGHT TO TAX, WHETHER IN THE HANDS OF THE CONCERN OR THE SHAREHOLDER. THE INTENTION BEHIND ENACTING TH E PROVISIONS OF SECTION 2(22)(E) AROSE FROM THE FACT THAT CLOSEL Y HELD COMPANIES WHICH ARE CONTROLLED BY A GROUP OF MEMBER S, WOULD NOT DISTRIBUTE SUCH PROFIT AS DIVIDEND BECAUSE DIVI DEND WOULD BECOME TAXABLE IN THE HANDS OF THE SHAREHOLDERS, IN STEAD, COMPANIES DISTRIBUTE THEM AS LOANS OR ADVANCES TO T HE SHAREHOLDERS OR TO A CONCERN IN WHICH SUCH SHAREHOL DERS HAS A 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 TREATED AS DIVIDEND. THE PROVISION CONTEMPLATES A CHARGE TO TAX IN THE HANDS OF THE SHAREHOLDERS AND NOT IN THE HANDS OF A SHAREHOLDER VIZ. THE CONCERNS. THE ORDINARY AND NAT URAL MEANING OF THE TERM DIVIDEND WOULD BE A SHARE IN PR OFIT TO AN 7 INVESTOR IN THE SHARE CAPITAL OF A LIMITED COMPANY. IF THE DEFINITION OF DIVIDEND IS EXTENDED TO A LOAN OR A DVANCE TO A NON SHAREHOLDER, THE ORDINARY AND NATURAL MEANING O F THE WORD DIVIDEND IS TAKEN AWAY. DEEMED DIVIDEND U/S 2(22)(E ) OF THE ACT CAN BE ASSESSED ONLY IN THE HAND OF A SHAREHOLD ER OF A LENDER COMPANY AND NOT IN THE HANDS OF ANY OTHER PE RSON. CIRCULAR NO.495 DATED SEP.22, 1987 (1987) 168 ITR ( ST) 87 ISSUED BY THE CBDT TO THE EXTENT IT SAYS THAT DEEME D DIVIDEND WOULD BE TAXED IN THE HANDS OF A CONCERN (NON SHARE HOLDER) ALSO IF THE CONDITIONS MENTIONED IN THE SECTION ARE SATISFIED IS NOT BINDING. IN THE PRESENT APPEAL, THE ASSESSEE CO MPANY IS NOT A REGISTERED HOLDER OF SHARES, THEREFORE, THE P ROVISIONS OF SECTION 2(22)(E) WOULD NOT BE APPLICABLE AT ALL TO THE CASE OF THE ASSESSEE FIRM. THE ASSESSEE IS FURTHER SUPPORTE D BY THE DECISION FROM INDORE BENCH OF THE TRIBUNAL IN THE C ASE OF M/S. AGNI ENGINEERS VS. ACIT (2011) 17 ITJ 38. THE SPECI AL BENCH IN THE CASE OF BHAUMIK COLOUR P. LTD. WHILE COMING TO A PARTICULAR CONCLUSION ALSO CONSIDERED THE DECISIONS IN CIT VS. HOTEL HILLTOP (2009) 313 ITR 116 (RAJ), CIT VS. MO ON MILLS LTD 8 (59 ITR 574) (SC), CIT VS. NALIN BIHARILAL SINGHA ( 74 ITR 849) (SC), ITO VS. ATCHAIAH (CH) (218 ITR 239) (SC), UNI ON OF INDIA VS. WAZIR SINGH (AIR) (1980) (RAJ) 252 (PARA 30) ET C. NO CONTRARY DECISION WAS BROUGHT TO OUR NOTICE BY THE REVENUE. IN VIEW OF THE FACTS AND THE JUDICIAL PRONOUNCEMENTS, THIS GROUND OF THE ASSESSEE IS ALLOWED. 4. SO FAR AS THE LAST GROUND 3(A) & 3(B) WITH REGAR D TO CONFIRMING THE ADDITION OF RS. RS.88,134/- ON ACCOU NT OF DISALLOWANCE OUT OF PETROL EXPENSES IS CONCERNED, W E FIND THAT THE LD. ASSESSING OFFICER DISALLOWED RS.88,134/- OU T OF RS.3,33,993/- CLAIMED UNDER THE HEAD PETROL EXPENS ES. THESE EXPENSES WERE CLAIMED FOR THE PURPOSE OF BUSI NESS. THE GROSS CONTRACT RECEIPTS OF THE ASSESSEE ARE TO THE TUNE OF RS.3,14,76,642/- WHICH AMOUNTS TO 0.77%. THE LD. CO UNSEL FOR ASSESSEE CLAIMED THAT FOR ASSESSMENT YEAR 2006-07, THE ASSESSEE CLAIMED EXPENDITURE OF RS.3,15,543/- ON TH E GROSS RECEIPT OF RS.6,41,16,615/- WHICH COMES TO 0.49%. I T WAS CLAIMED THAT THERE IS AN INCREASE IN EXPENDITURE UN DER THIS HEAD BY 0.28%. KEEPING IN VIEW THE TOTALITY OF FACTS AND TO MEET THE 9 END OF JUSTICE, WE DIRECT THE ASSESSING OFFICER TO DISALLOW 10% ON ACCOUNT OF NON-VERIFICATION OF VOUCHERS/BILLS ET C. OUT OF TOTAL CLAIM OF RS.3,33,993/- AS AGREED BY THE LD. COUNSEL FOR ASSESSEE, THEREFORE, THIS GROUND IS PARTLY ALLOWED. FINALLY, THE APPEAL OF THE ASSESSEE IS PARTLY ALLO WED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF LEARNED REPRESENTATIVES OF BOTH THE SID ES AT THE CONCLUSION OF THE HEARING. SD SD (R.C.SHARMA) (JOGINDER SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 10.10.2011 COPY TO: APPELLANT, RESPONDENT, CIT, CIT(A), DR, GU ARD FILE !VYAS!