I.T.O.3(3)(3), MUMBAI V. SHRIPAL RAJ LODHA, MUMBAI

ITA 5989/MUM/2012

• Counselvise Citation: 598919914 RSA 2012
• Duration Of Justice: 2 year(s) 3 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-01-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 10-12-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 01-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NEIL PHILIP
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Earning of tax free income; Deemed dividend; Tax effect; Commercial expediency
• Section: 143(3); 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL C , BENCH MUMBAI BEFORE SHRI JOGINDER SINGH, JM & SHRI R.C.SHARMA, AM ITA NO. 59 78 / MUM /20 1 2 ( ASSESSMENT YEAR : 200 9 - 2010 ) ACIT, CIR . 3(3), MUMBAI VS. S MT. SARITA LODHA, 807, TULSIANI CHAMBERS, 212, NARIMAN POINT, MUMBAI - 400 021 PAN/GIR NO. : A AJPL 29 56 P ( APPELLANT ) .. ( RESPONDENT ) AND ITA NO. 5989 /MUM /20 12 ( ASSESSMENT YEAR : 2009 - 2010 ) ITO , 3(3)(3), MUMBAI VS. SHRI SHRIPAL RAJ LODHA, 807, TULSIANI CHAMBERS, 212, NARIMAN POINT, MUMBAI - 400 021 P AN/GIR NO. : A AJPL 2949 L ( APPELLANT ) .. ( RESPONDENT ) /REVENUE BY : SHRI NEIL PHILIP /ASSESSEE BY : SHRI RAJENDRA JAIN DATE OF HEARING : 16 TH DECEMBER , 201 4 DATE OF PRONOUNCEMENT 14 TH JANUARY,2015 O R D E R PER R.C.SHARMA (A.M) : TH E SE ARE APPEALS FILED BY REVENUE AGAINST THE ORDER OF CIT(A) FOR THE ASSESSMENT YEAR 200 9 - 2010 , IN THE MATTER OF ORDER PASSED UNDER SECTION 143(3) OF THE I.T. ACT. ITA NO S . 5989&5978/12 2 ITA NO. 5989/MUM/2012 : 2 . IN THIS APPEAL, THE REVENUE IS BASICALLY AGGRIEVED FOR DELETING DISALLOWANCE OF INTEREST PAID TO BANK. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. THE AO HAS DEALT WITH THE ISSUE AT PARA 2 TO 5 OF HIS ASSE SSMENT ORDER, WHEREIN HE OBSERVED THAT ASSESSEE HAS UTILIZED PART OF INTEREST BEARING HOME LOAN FROM ICICI BANK FOR THE PURPOSES OTHER THAN THOSE FOR WHICH THE LOAN WAS TAKEN FROM ICICI BANK. ACCORDINGLY, HE MADE DISALLOWANCE OF RS. 37,75,818/ - . 4. BY THE I MPUGNED ORDER, CIT(A) DELETED THE DISALLOWANCE AFTER OBSERVING AS UNDER : - 5.3 I HAVE CONSIDERED THE A.O.'S ORDER AS WELL AS THE APPELLANT SUBMISSION. I HAVE ALSO TAKEN NOTE OF THE CASE LAW RELIED UPON BY T HE APPELLANT. TAKING NOTE OF ALL THESE FACTS, I F IND THAT THE APPELLANT COMPANY RECEIVED THE SAID LOAN IN THE PRECEDING YEAR AND THE SAME WAS UTILIZED IN THE PRECEDING YEAR ONLY, HENCE IT IS QUITE CLEAR THAT NO LOAN WAS TAKEN IN THE YEAR UNDER CONSIDERATION AND THE A.O. WAS NOT JUSTIFIED IN MAKING THE DI SALLOWANCE OUT OF INTEREST PAID DURING THE RELEVANT ASSESSMENT YEAR, WHEN THERE WAS NO SUCH DISALLOWANCE MADE IN THE PRECEDING YEAR. FURTHER ON PERUSAL OF THE DETAILS OF THE SHARE HOLDING OF THE APPELLANT WITH M/ S UMA POLYMERS LTD .. IT IS CLEAR THAT THE SH ARE ARE ACQUIRED MAINLY TO ENSURE CONTROLLING POWER INTEREST IN THE SAID COMPANY AND THE DIVIDEND INCOME IS INCIDENTAL TO THE BUSINESS ACTIVITY. HENCE AFTER CONSIDERING THE HON'BLE KA RNA TAKA HIGH COURT IN THE CASE OF CCI LTD. VS. JCIT (ITA NO. 359 OF 2011) DECIDED ON 28.02.2012, WHEREIN IT HAS BEEN CLEARLY HELD THAT WHERE THE DIVIDEND INCOME IS INCIDENTAL TO THE BUSINESS ACTIVITY, PROVISIONS OF SEE 14A WOULD NOT APPLY, I FIND MERITS IN THE ARGUMENTS OF THE APPELLANT. 5.4 FURTHER EVEN I FIND THAT THE HOUSI NG LOAN, WHICH THE A.O. IS MENTIONING IN PARA - 4 OF THE ASSESSMENT ORDER WAS OBTAINED IN THE PRECEDING YEAR, WHICH WAS UTILIZED AS PER THE APPELLANT'S SUBMISSION IN EARLIER YEARS ITSELF. FURTHER TO THAT, THERE WAS NO ADDITION MADE IN THE PRECEDING YEAR BY T HE A.O., WHEN SIMILAR SET OF FACTS WERE AVAILABLE. FURTHER TO THAT, I ALSO FIND THAT THE A.O. MADE THE DISALLOWANCE MERELY ON PRESUMPTION BASIS THAT THE BORROWED FUNDS MIGHT HAVE BEEN UTILIZED FOR OTHER THAN INVESTMENTS IN HOUSING FOR WHICH SUCH LOAN WAS O BTAINED . CONSIDERING THE APPELLANT'S SUBMISSION AND ALSO THE FACTS AVAILABLE ON RECORD, I AM OF THE CONSIDERED VIEW THAT THE INTEREST EXPENDITURE IS AN ALLOWABLE ITA NO S . 5989&5978/12 3 DEDUCTION U/S. 36(1) OF THE ACT BEING INCURRED FOR THE PURPOSES OF BUSINESS, WHICH WAS UTILIZE D BY THE APPELLANT MAINLY FOR ACQUIRING OF SHARES OF GROUPS COMPANIES I.E. M /S UMA POLYMERS LTD. FOR HAVING CONTROL OF MANAGEMENT. THUS, TAKING NOTE OF ALL THESE FACTS, I CONSIDER IT PROPER AND APPROPRIATE TO HOLD THAT THE AO WAS NOT JUSTIFIED IN REJECTING THE AFORESAID CLAIM OF DEDUCTION OF INTEREST EXPENDITURE OF THE APPELLANT. ACCORDINGLY, THIS GROUND OF APPEAL IS ALLOWED. 5. WE HAVE CONSIDERED RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND ALSO DELIBERATED ON THE JUD ICIAL PRONOUNCEMENTS REFERRED BY LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS AND CITED AT BAR BY LD. AR AND DR DURING THE COURSE OF HEARING BEFORE US . FROM THE RECORD WE FOUND THAT AMOUNT OF LOAN WAS RAISED IN THE EARLIER YEAR AND IT WAS UTILIZED FOR THE PURPOSES FOR WHICH IT WAS RAISED, NO DISALLOWANCE WAS MADE DURING THE EARLIER YEAR. BY RELYING ON THE DECISION OF HON BLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. VS. JCIT, PASSED IN ITA NO.359 OF 2011, DATED 28 - 2 - 2012, THE CIT(A) HAS DELETED DISALLOWA NCE BY OBSERVING THAT THE PROVISIONS OF SECTION 14A WOULD NOT APPLY TO THE FACTS OF THE INSTANT CASE. A CATEGORICAL FINDING HAS BEEN RECORDED BY THE CIT(A) TO THE EFFECT THAT NO DISALLOWANCE FOR THE LOAN SO RAISED AND UTILIZED WAS MADE BY THE AO IN THE EAR LIER YEAR AND SINCE THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES DURING THE YEAR UNDER CONSIDERATION, NO DISALLOWANCE WAS WARRANTED U/S.36(1) . THE DETAILED FINDING RECORDED BY THE CIT(A) HAS NOT BEEN CONTROVERTED BY THE LEARNED DR BY BRINING ANY POSIT IVE MATERIAL ON RECORD. ACCORDINGLY, WE DO NOT FIND ANY REASON TO INTERFERE IN THE FINDINGS OF THE CIT(A) RESULTING INTO IN DELETI ON OF DISALLOWANCE OF INTEREST OF RS. 37,75,818/ - . 6. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. ITA NO S . 5989&5978/12 4 ITA NO. 5978/MUM/201 2 : 7. IN THIS APPEAL, THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS : - 1. 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) WAS JUSTIFIED IN DELETING THE ADDITION ON ACCOUNT OF RE - COMPUTATION OF LTCG AT RS.2,91,273/ - IN PLACE OF THE LTC LOSS RETURNED BY THE ASSESSEE AT RS.5,626/ - , WITHOUT APPRECIATING THE FACT THAT THE BOOK VALUE OF THE SAID SHARES OF UMAX PACKAGING LIMITED, ON THE BASIS OF THE NET WORTH, WAS RS.39.69 PER SHARE WHILE THE ASSESSEE WAS CLAIMING A SALE PRICE OF RS .10/ - PER SHARE.' 2. 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) WAS JUSTIFIED IN DELETING THE ADDITION OF RS.27,05,117/ - ULS.2(22)(E) OF THE ACT WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE WAS A SHARE - HOLDER IN T HE SAID COMPANY M/S. UMA POLYMERS LTD. AND HENCE THE PROVISIONS OF2(22)(E) SQUARELY APPLIED TO THE ASSESSEE'S CASE.' 3. 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) WAS JUSTIFIED IN RESTRICTING THE DISALLOWANCE ULS.14A OF THE ACT, R.W.R. 80 OF THE IT RULES, 1962 TO RS.4,10,462/- WITHOUT APPRECIATING THE FACT THAT THE CORRECT COMPUTATION OF DISALLOWANCE ULS.14A R.W.R. 80 COMES TO RS.6,10,706/ - AND THAT THERE WAS NO REASONING PROVIDED BY THE ASSESSEE TO DEVIATE FROM THE S AME.' 4. 'THE APPELLANT PRAYS THAT THE ORDER OF CIT (A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED'. 8 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT ASSESSEE HAS CLAIMED LONG TERM CAPITAL LOSS OF RS. 5,626/ - ON THE TRANSACTION OF SALES OF SHARES OF UMAX PACKAGING LIMITED. THE ASSESSEE SOLD THE SHARES AT RS. 10/ - PER SHARE, HOWEVER, THE AO HAS TAKEN THE SALE PRICE AT RS. 39.69 PER SHARE AND ACCORDINGLY COMPUTED THE LONG TERM CAPITAL GAIN AT RS. 2,91,273/ - , IN PLACE OF LONG TERM CAPITAL LOSS OF RS. 5,626/ - CLAIMED BY THE ASSESSEE. BY THE IMPUGNED ORDER, THE CIT(A) DELETED THE ADDITION AFTER HAVING THE FOLLOWING OBSERVATION : - 6.3 I HAVE CONSIDERED THE A.O. 'S ORDER AS WELL AS THE APPELLANT'S SUBMISSION. HAVING CONSIDE RED BOTH, I FIND MERITS IN THE ARGUMENTS OF THE APPELLANT. IT IS SEEN THAT THE A.O. WHILE COMPUTING THE LONG TERM CAPITAL GAIN TOOK THE BOOK VALUE AT RS.39.69 PER SHARE INSTEAD ITA NO S . 5989&5978/12 5 OF RS. 10 / - PER SHARE. HOWEVER I DO NOT AGREE WITH THE A.O. 'S ACTION FOR MAKING SUCH ADJUSTMENT AS IT IS AMPLY CLEAR THAT SECTION 48 DEALS WITH THE FULL VALUE OF CONSIDERATION. BUT IN THE INSTANT CASE, THE APPELLANT HAS SOLD T HE SHARES AT A VALUE OF RS. 10 / - PER SHARES AND TAKEN THE FULL VALUE OF CONSIDERATION, W HICH IS COMPLETELY JUS TIFIED. THE A.O. CANNOT REPLACE THE SALE CONSIDERATION VALUE WI THOUT ANY COGENT EVIDENCE OR DOCUMENTS FOR SUCH RECEIPT. FURTHER RELIANCE IS KEPT ON OF DCIT V S JINDAL EQUIPMENT LEASING & CONSULTANCY SERVICES , LTD 131 ITD 263 (DELHI TRIB.), CIT VS LATE GULSH AN KUMAR THROUGH LR ON 3 MAY, 2002 (2002) 175 CTR DEL 416; 257 ITR 703 & RELIANCE COMMUNICATIONS INFRASTRUCTURE LTD. VS. CIT (2010) 40 DTR 186 / (2009) 34 SOT 241 (MUM.)(TRIB.). FURTHER THE CASE LAWS RELIED UPON BY THE APPELLANT ALSO SUPPORTS THE CONTENTIO N OF THE APPELLANT IN TAKING THE FULL VALUE OF CONSIDERATION. THUS, AFTER TAKING NOTE OF ALL THESE FACTS AS WELL AS TAKING NOTE OF CASE LAWS RELIED UPON BY THE APPELLANT, I AM OF THE CONSIDERED VIEW THAT THE A.O. WAS NOT JUSTIFIED IN COMPUTING THE LONG TER M CAPITAL GAIN. 9. WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND FROM THE RECORD THAT ASSESSEE HAS ACTUALLY SOLD SHARES AT A VALUE OF RS.10/ - PER SHARES AND COMPUTED CAPITAL GAINS BY ADOPTING THE SALE CONSIDERATION . HOWEVER, THE AO BY IGNORING THE ACTUA L SALE CONSIDERATION TOOK THE BOOK VALUE OF SHARES AT RS. 39.69 FOR COMPUTING CAPITAL GAIN. WE DO NOT FIND ANY MERIT IN THE ACTION OF THE AO INSOFAR AS WITHOUT BRINGING ANY COGENT EVIDENCE OR DOCUMENTS EVIDENCING RECEIPT OF RS.39.69 PER SHARE, THE AO HAS RE PLACED THE ACTUAL SALE CONSIDERATION OF RS.10/ - PER SHARE, AT WHICH SHARES WERE ACTUALLY SOLD. AS PER PROVISIONS OF SECTION 48, FULL VALUE OF CONSIDERATION MEANS THE ACTUAL AMOUNT RECEIVED . SECTION 48 OF THE IT ACT, 1961 CLEARLY LAYS DOWN THAT THE INCOME CHARGEABLE UNDER THE HEAD CAPITAL GAINS SHALL BE COMPUTED BY DEDUCTING FROM THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE CAPITAL ASSET THE FOLLOWING AMOUNT, NAMELY ------ . THE TERM FULL VALUE OF CONSIDERATION DOES NOT MEAN MARKET VALUE OF THAT ASSET WHICH IS TRANSFERRED EXCEPT OTHERWISE STATED SPECIFICALLY IN ANY OF THE PROVISIONS. THERE ARE CERTAIN PROVISIONS IN THE IT ITA NO S . 5989&5978/12 6 ACT WHERE THE MARKET VALUE ON THE DATE OF TRANSFER OF AN ASSET IS CONSIDERED TO BE THE FULL VALUE OF CONSI DERATION LIKE SEE 45 (IA), 45(2), 45(3), 45(4), 46(2), FOURTH PROVISO TO SEE 48 AND SEE 50C. THERE IS NO OTHER PROVISION FOR THE PURPOSE OF TAXING CAPITAL GAIN WHERE THE ACTUAL SALE CONSIDERATION IS TO BE SUBSTITUTED BY THE MARKET VALUE OF THE THAT ASSET O N THE DATE OF ITS TRANSFER. IT IS NOT THE CASE OF THE AO THAT THESE PROVISIONS WERE ATTRACTED IN THE ASSESSEE'S CASE DURING THE RELEVANT ASST YEAR. I N SUCH CASES ADEQUACY OR NON ADEQUACY OF THE CONSIDERATION IS NOT A RELEVANT FACTOR FOR THE PURPOSE OF DETE RMINING OF THE F ULL VALUE OF CONSIDERATION. THE RELIANCE IS PLACED TO THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. SMT NILOFER 1. SINGH (2009) 221 CTR (DEL) 27 7 IN WHICH THE DECISIONS OF HON 'BLE SUPREME COURT IN THE CASES OF CIT VS. GILLANDERS ARBUTHNOT & CO. (1973) 87 ITR 407(SC) AND CFT VS. GEORGE HANDERSON & CO. LTD (1967) 66 ITR 622 (SC) WERE FOLLOWED. 10. THE CIT(A) HAS DELETED THE ADDITION SO MADE AFTER RELYING THE JUDICIAL PRONOUNCEMENTS AS REFERRED IN PARA 6.3. THE DETAILED F INDINGS RECORDED BY CIT(A) AT PARA 6.3 HAVE NOT BEEN CONTROVERTED BY LD. DR BY BRINGING ANY POSITIVE MATERIAL ON RECORD. ACCORDINGLY, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT(A) RESULTING INTO DELETION OF ADDITION OF CAPITAL GAIN COMPUTED BY THE AO AT RS. 2,91,273/ - IN PLACE OF CAPITAL LOSS OF RS. 5,626/ - . 1 1 . THE NEXT GRIEVANCE OF REVENUE RELATES TO DELETION ADDITION MADE U/S. 2(22)(E) OF THE ACT. 1 2 . IN THE ASSESSMENT ORDER, THE AO OBSERVED THAT ASSESSEE HAD RECEIVED MONEY FROM A COMPANY IN WHICH S HE WAS HAVING SUBSTANTIAL ITA NO S . 5989&5978/12 7 INTEREST. THE AO OBSERVED THAT ON 4 - 11 - 2008, THE ASSESSEE WAS IN RECEIPT OF MONEY OF RS. 76,44,811/ - AS AGAINST ADVANCES TO THE AFORESAID ENTITY OF RS. 49,39,194/ - . THUS, ON THE SAID DATE ASSESSEE HAD RECEIVED AN AMOUNT OF RS. 27,05,617/ - (76,44,811 49,39,194) WHICH IS IN EXCESS OF LOAN ALREADY GIVEN TO THE SAID COMPANY. AS PER THE AO ASSESSEE HAS DERIVED A BENEFIT OF RS. 27,05,617/ - ON THE SAID DATE. HE, THEREFORE, ADDED THE SAID AMOUNT U/S. 2(22)(E) OF THE ACT. BY THE IMPU GNED ORDER THE CIT(A) DELETED THE ADDITION SO MADE AFTER HAVING THE FOLLOWING OBSERVATION : - 7.3 I HAVE CONSIDERED THE AOS ORDER AS WELL AS THE APPELLANT SUBMISSION. HAVING CONSIDERED BOTH, I FIND MERITS IN THE ARGUMENTS OF THE APPELLANT. IT IS NOTICED T HAT THE APPELLANT IS THE PROMOTER OF M/S UMA POLYMERS LTD. AND DUE TO SOME BUSINESS EXIGENCIES, THE APPELLANT FINANCIAL ASSIST THE AFORESAID COMPANY. IT IS ALSO EVIDENT THAT SAID TRANSACTIONS ARE ALSO ACCOUNTED BETWEEN BOTH THE PARTIES ON REGULAR BASIS I.E THE APPELLANT AS WELL AS M/S UMA POLYMERS LTD. THUS, IN MY CONSIDERED VIEW THE SAME WILL NOT AMOUNTS TO DEEMED DIVIDEND IN THE HANDS OF THE APPELLANT. FURTHE R IN THIS R E GARD. I ALSO TAKE STRENGTH FROM THE RECENT DECISION OF DELHI HIGH COURT IN THE CASE O F CIT VS. ANKITECH PVT. LTD. (ITA NO.462 OF 2009) WHEREIN THE HON 'BLE HIGH COURT HAS CATEGORICALLY HELD AS UNDER: - ' THE INTENTION BEHIND ENACTING PROVISIONS OF SECTION 2(22)(E) IS THAT CLOSELY HELD COMPANIES (I.E. COMPANIES IN WHICH PUBLIC ARE NOT SUBST ANTIALLY 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 SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED PROFITS AS DIVIDEND, COMPANIES DISTRIBUTE THEM AS LOAN OR ADVANCES TO SHAREHOLDERS OR TO CONCERN IN WHICH SUCH SHAREHOLDERS HAVE SUBSTANTIA L INTEREST OR MAKE ANY PAYMENT ON B EHALF OF OR/OR THE INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER IN SUCH AN EVENT, BY THE DEEMING PROVISIONS, SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDERS. THE DEEMIN G PROVISIONS AS IT A PPLIES 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 LOA N OR ADVANCE. FURTHER, IT IS AN ADMITTED CASE THAT UNDER NORMAL CIRCUMSTANCES, SUCH A LOAN OR ADVANCE GIVEN TO THE SHAREHOLDERS OR TO A CONCERN, ITA NO S . 5989&5978/12 8 WOULD NOT QUALIFY AS DIVIDEND IT HAS BEEN MADE SO BY LEGAL FICTION CREATED UNDER SECTION 2(22)(E) OF THE ACT. WE HAVE TO KEEP IN MIND THAT THIS LEGAL PROVISION RELATES TO 'DIVIDEND'. THUS, BY A DEEMING PROVISION, IT IS 'THE DEFINITION OF DIVIDEND WHICH IS ENLARGED. LEGAL FICTION DOES NOT EXTEND TO 'SHAREHOLDER'. WHEN WE KEEP IN MIND THIS ASPECT. THE CONCLUSION WO ULD BE OBVIOUS, VIZ, LOAN OR ADVANCE GIVEN UNDER THE CONDITIONS SPECIFIED UNDER SECTION 2(22)(E) OF THE ACT WOULD A L SO BE TREATED AS DIVIDEND. THE FICTION HAS TO STOP HERE AND IS NOT TO BE EXTENDED FURTHER FOR BROADENING THE CONCEPT OF SHAREHOLDERS BY WAY OF LEGAL FICTION. LT IS A COMMON CASE THAT ANY COMPANY IS SUPPOSED TO DISTRIBUTE THE PROFITS IN THE FORM OF DIVIDEND TO ITS SHAREHOLDERS/ MEMBERS AND SUCH DIVIDEND CANNOT BE GIVEN TO NON - MEMBER S . THE SECOND CATEGORY SPECIFIED UNDER SECTION 2(22)(E) OF THE ACT, VIZ. A CONCERN (LIKE THE ASSESSEE HEREIN), WHICH IS GIVEN THE LOAN OR ADVANCE IS ADMITTEDLY NOT A SHAREHOLD ER/MEMBER OF THE PAYER COMPANY. THEREFORE, UNDER NO CIRCUMSTANCE, IT COULD BE TREATED AS SHAREHOLDER MEMBER RECEIVING DIVIDEND. IF THE INTENTIO N OF THE LEGISLATURE WAS TO TAX SUCH LOAN OR ADVANCE AS DEEMED DIVIDEND AT THE HANDS OF DEEMING SHAREHOLDER', THEN THE LEGISLATURE WOULD HAVE INSERTED DEEMING PROVISION IN RESPECT OF SHAREHOLDER AS WELL, THAT HAS NOT HAPPENED. MOST OF THE ARGUMENTS OF THE LEARNED COUNSELS FOR THE REVENUE WOULD STAND ANSWERED, ONCE WE LOOK INTO THE MATTER FROM THIS PERSPECTIVE. IN A CASE LIKE THIS, THE RECIPIENT WOULD BE A SHAREHOLDER BY WAY OF DEEMING PROVISION. IT IS NOT CORRECT ON THE PART OF THE REVENUE TO ARGUE THAT I F THIS POSITION IS TAKEN, THEN THE INCOME 'IS NOT TAXED AT THE HANDS OF THE RECIPIENT'. SUCH AN ARGUMENT BASED ON THE SCHEME OF THE ACT AS PROJECTED BY THE LEARNED COUNSELS FOR THE REVENUE ON THE BASIS OF SECTIONS 4, 5, 8,14 AND 56 OF THE ACT WOULD BE OF N O AVAIL. SIMPLE ANSWER TO THIS ARGUMENT IS THAT SUCH LOAN OR ADVANCE, IN THE FIRST PLACE, IS NOT AN INCOME. SUCH A LOAN OR ADVANCE HAS TO BE RETURNED BY THE RECIPIENT TO THE COMPANY, WHICH HAS GIVEN THE LOAN OR ADVANCE. PRECISELY, FOR THIS VERY REASON, T HE COURTS HAVE HELD THAT IF THE AMOUNTS ADVANCED ARE FOR BUSINESS TRANSACTIONS BETWEEN THE PARTIES, SUCH PAYMENT WOULD NOT FALL WITHIN THE DEEMING DIVIDEND UNDER SECTION 2(22) (E) OF THE ACT. IN SO FAR AS RELIANCE UPON CIRCULAR NO.495 DATED 22.09.1997 IS SUED BY CENTRAL BOARD OF DIRECT TAXES IS CONCERNED, WE ARE INCLINED TO AGREE WITH THE OBSERVATIONS OF THE MUMBAI BENCH DECISION IN BH AUMIK COLOUR (P) LTD. (SUPRA) THAT SUCH OBSERVATIONS ARE NOT BINDING ON THE COURTS. ONCE IT IS FOUND THAT SUCH LOAN OR ADVA NCE CANNOT BE TREATED AS DEEMED DIVIDEND AT THE HANDS OF SUCH A CONCERN WHICH IS NOT A SHAREHOLDER, AND THAT ACCORDING TO US IS THE CORRECT LEGAL POSITION, SUCH (CIRCULAR 'WOULD BE OF NO AVAIL. NO DOUBT, THE LEGAL FICTION/ DEEMED PROVISION CR E ATED BY THE LEGISLATURE HAS TO BE TAKEN TO 'LOGICAL CONCLUSION' AS HELD IN ANDALEEB SEHGAL (SUPRA). THE REVENUE WANTS THE DEEMING PROVISION TO BE EXTENDED WHICH IS ILLOGICAL AND ATTEMPT IS TO CREATE A REAL LEGAL FICTION, WHICH IS NOT CREATED BY THE LEGISLATURE. WE SA Y AT THE COST OF REPETITION THAT THE DEFINITION OF SHAREHOLDER IS NOT ENLARGED BY ANY FICTION. BEFORE WE PART WITH, SOME COMMENTS ARE TO BE NECESSARILY MADE BY US. AS POINTED OUT ABOVE, IT IS NOT IN DISPUTE THAT THE CONDITIONS ITA NO S . 5989&5978/12 9 STIPULATED IN SECTION 2(2 2 )( E) OF THE ACT TREATING THE LOAN AND ADVANCE AS DEEMED DIVIDEND ARE ESTABLISHED IN THESE CASES. THEREFORE, IT WOULD ALWAYS BE OPEN TO THE REVENUE TO TAKE CORRECTIVE MEASURES BY TREATING THIS DIVIDEND INCOME AT THE HANDS OF THE SHAREHOLDERS AND TAX THEM ACCO RDINGLY. AS OTHERWISE, IT WOULD AMOUNT TO ESCAPEMENT OF INCOME AT THE HANDS OF THOSE SHAREHOLDERS. WE MAY ALSO POINT OUT HERE THAT WHEN THESE APPEALS ALONG WITH OTHER APPEALS WERE HEARD, SOME APPEALS WERE FISTED AND THE TAX EFFECT OF WHICH WAS LESS THAN RS.10 LACS AND THOSE WERE DISMISSED ON THAT GROUND. HAD THOSE APPEALS BEEN DECIDED ON MERITS, STILL THE ASSESSEES WOULD HAVE SUCCEEDED. AT THE SAME TIME, IN THOSE CASES, WE WOULD NOT LIKE THE SHAREHOLDERS TO GO SCOT FREE AND THEREFORE, EVEN IN THOSE CASES, IT WOULD BE PERMISSIBLE FOR THE REVENUE TO TAX REMEDIAL STEPS BY ROPING IN THE SHAREHOLDER S ) AND TAX THE DEEMED DIVIDEND AT THEIR HANDS. WE, THUS, ANSWER THE QUESTIONS IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE, AS A RESULT, THESE APPEALS ARE DIS MISSED. ' 7.4 TAKING NOTE OF THE AFORESAID SUBMISSION OF THE APPELLANT AS WELL AS THE DECISION OF DELHI HIGH COURT IN THE CASE OF ERR VS. ANKITECH PVT. LTD. (ITA NO.462 OF 2009), I AM OF THE CONSIDERED VIEW THAT THE A.O. WAS NOT JUSTIFIED IN HIS ACTION I N TAXING THE AFORESAID SUM IN THE HANDS OF THE APPELLANT AS DEEMED DIVIDEND. ACCORDINGLY, THE ADDITION SO MADE BY THE A.O. AS DEEMED DIVIDEND TO THE APPELLANT'S INCOME IS DELETED. THUS, THE APPELLANT THIS GROUND OF APPEAL IS ALLOWED . 13. WE HAVE CONSIDER ED RIVAL CONTENTIONS AND FOUND FROM THE RECORD THAT ASSESSEE IS A PROMOTER OF M/S. UMA POLYMERS LTD. AND DUE TO BUSINESS EXIGENCIES THE ASSESSEE HAS FINANCIALLY ASSISTED THE AFORESAID COMPANY. THE ASSESSEE WAS MAINTAINING CURRENT ACCOUNT WITH M/S UMA POLYM ERS LTD. IN WHICH SHE OWNED MORE THAN 10% OF TOTAL SHARE. THE SAID COMPANY HAD TO RAISE INTEREST FREE FUNDS TO SATISFY THE TERMS AND CONDITIONS OF ITS BANKERS FOR RAISING ITS CONTRIBUTION AND THE ASSESSEE, BEING ONE OF THE PROMOTERS IN THE ABOVE COMPANY, H AD TO PROVIDE INTEREST FREE FUNDS TO THE COMPANY. THUS, THE COMPANY HAS BEEN COMMERCIALLY BENEFITED TO RAISE HUGE INTEREST FREE FUNDS FROM THE ASSESSEE FROM TIME TO TIME. AS PER THE CURRENT ACCOUNT MAINTAINED WITH THE COMPANY, THERE WAS DEBIT BALANCE AS ON 4 - 11 - 2008 AND ASSESSEE HAD CREDIT BALANCE IN THE ITA NO S . 5989&5978/12 10 ABOVE COMPANY S ACCOUNT OF R S. 27,05, 6 17/ - , WHICH WAS RETURNED WITHIN A SHORT PERIOD AND EVEN BEFORE THE END OF RELEVANT ASSESSMENT YEAR. THUS, ADVANCING OF FUND BY THE ASSESSEE TO THE SAID COMPANY WAS ALSO DEBIT BALANCE IN THE ASSESSEES ACCOUNT IN ITS BOOKS. SINCE THE TRANSACTION WAS UNDER THE PROVISIONS OF COMMERCIAL EXPEDIENCY, THE SAME CANNOT BE BRANDED AS DEEMED DIVIDEND U/S.2(22)(E) OF THE ACT, SINCE THE ASSESSEE HAS NOT GAINED ANY BENEFIT OUT OF IT, ON THE CONTRARY, ASSESSEE HAS SUFFERED LOSS DUE TO NON - RECEIVED OF ANY INTEREST ON ADVANCE MADE BY HER TO THE ABOVE COMPANY. IT IS CLEAR FROM THE STATEMENT OF ACCOUNT OF ASSESSEE WITH THE SAID COMPANY THAT FUNDS WERE PROVIDED OR TAKEN WITHOUT ANY STIPULATI ON ATTACHED TO IT FOR ITS REPAYMENT AND, THEREFORE, IT COULD NOT FALL IN THE DEFINITION OF LOAN TO ATTRACT PROVISIONS OF SECTION 2(22)(E). AFTER RECORDING DETAILED FINDING WITH REGARD TO COMMERCIAL EXPEDIENCY, THE CIT(A) HAS DELETED THE ADDITION. THE CIT(A ) HAS ALSO CONSIDERED THE PROPOSITION OF LAW LAID DOWN BY THE HONBLE DELHI HIGH COURT IN THE CASE OF ANKITECH PVT. LTD. (ITA NO. 462 OF 2009) , WHEREIN IT WAS HELD THAT INTENTION BEHIND ENACTING OF SECTION 2(22)(E) IS THAT CLOSELY HELD COMPANIES WHICH ARE C ONTROLLED 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. INSTEAD OF DISTRIBUTING ACCUM ULATED PROFITS AS DIVIDEND, COMPANIES DISTRIBUTE THEM AS LOAN OR ADVANCES TO SHAREHOLDERS FOR THEIR INDIVIDUAL BENEFIT. IN SUCH AN EVENT BY THE DEEMING PROVISIONS, SUCH PAYMENT BY THE COMPANIES IS TREATED AS DEEMED DIVIDEND U/S.2(22)(E) OF THE ACT. CONSI DERING THE TOTALITY OF FACTS ITA NO S . 5989&5978/12 11 AND CIRCUMSTANCES OF THE CASE VIS - - VIS COMMERCIAL EXPEDIENCY AND NATURE OF CURRENT ACCOUNT OF ASSESSEE WITH THE COMPANY WHEN AMOUNT WAS GIVEN AND RETURNED BACK AS PER CRUCIAL REQUIREMENT OF BUSINESS, THE TRANSACTIONS SO ENTERE D ARE NOT COVERED BY MISCHIEF OF SECTION 2(22)(E) OF THE ACT. ACCORDINGLY, WHEN THE FINDINGS RECORDED BY CIT(A) ARE AS PER MATERIAL ON RECORD, WHICH HAVE NOT BEEN CONTROVERTED BY REVENUE BY BRINGING ANY POSITIVE MATERIALS ON RECORD, THERE IS NO REASON TO INTERFERE IN SUCH FINDINGS. IN THE RESULT, GROUND TAKEN BY THE REVENUE IS DISMISSED. 1 4 . THE NEXT GRIEVANCE OF THE REVENUE RELATES TO DELETION OF DISALLOWANCE OF INTEREST OF RS. 6,10,706/ - BY INVOKING PROVISIONS OF SECTION 14A. BY THE IMPUGNED ORDER, CIT(A ) DELETED THE DISALLOWANCE AFTER HAVING THE FOLLOWING OBSERVATIONS : - 8.3 I HAVE CONSIDERED THE A.O'S ORDER AS WELL AS THE APPELLANT SUBMISSION. I HAVE ALSO TAKEN NOTE OF THE CASE LAW RELIED UPON BY THE APPELLANT IN THE CASE OF CIT, BANGLORE VS. ANAND T ECHNOLOGY RESOURCE PARK PVT . LTD. REPORTED IN 202 TAXMAN 3 54, WHEREIN IT HAS BEEN CLEARLY HELD THAT DIVIDEND INCOME IS INCIDENTAL TO THE BUSINESS ACTIVITY AND PROVISIONS OF SECTION 14 A WOULD NOT APPLY. FURTHER IN THE APPELLANT 'CASE, THE AMOUNT INVESTED IN SHARES TO ACQUIRE CONTROLLING INTEREST IN A COMPANY AMOUNTED TO BUSINESS ACTIVITY AND THE INTEREST IS ANY PAID ON BORROWINGS FOR MAKING SUCH I NVESTMENT WOULD BE DEDUCTIBLE U/ S 36(L)(III) OF THE IT ACT, 1961. IT IS ALSO EVIDENT THAT THE ABOVE VIEW IS ALSO SUPPORTED BY THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF ANAND TECHNOLOGY RESOURCE PARK PVT. LTD. (SUPRA). HOWEVER AFTER TAKING NOTE OF THE AFORESAID FACTS OF THE APPELLANT CASE, I FIND THAT IN THE CURRENT YEAR SECTION 14A R.W.RULE 8D OF THE IT RULES I S APPLICABLE .IN THE APPELLANT'S CASE CONSIDERING THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. ACCORDINGLY AFTER TAKING NOTE OF THE APPELLANT'S SUBMISSION, WHICH FINDS PLACE IN THE A.O.'S ORDER IN PARA - 8.3 OF THE OR DER, I CONSIDER IT PROPER AND APPROPRIATE TO HOLD THAT THE DISALLOWANCE UNDER RULE 8D R.W.SECTION 14A SHOULD BE RESTRICTED TO RS.4,10,462/ - AS WORKED OUT BY THE APPELLANT ITSELF. ACCORDINGLY THE ADDITION UNDER SECTION 14A R.W.RULE 8D OF THE IT RULES RESTRI CTED TO RS.4,10,462/ - INSTEAD OF RS.6,10,706/ - AS WORKED OUT BY THE AO. THUS, THE APPELLANTS THIS GROUND OF APPEAL IS PARTLY ALLOWED. ITA NO S . 5989&5978/12 12 15. LD. DR RELIED ON THE ORDER OF AO. ON THE OTHER HAND, LEARNED AR CONTENDED THAT ASSESSEE HAS CALCULATED DISALLOWANCE UNDER RULE 8D(III) MADE BY THE AO IS NOT CORRECT IN VIEW OF THE FACT THAT THE AO HAS INCLUDED THE VALUE OF TOTAL INVESTMENT FOR CALCULATION OF DISALLOWANCE WHEREAS ONLY THOSE INVESTMENTS SHOULD HAVE BEEN INCLUDED WHICH HAVE MADE FOR THE PURPOSE OF EARNING EXEMPT INCOME. AS PER LD. AR ASSESSEE HAD MADE SIGNIFICANT INVESTMENT IN SHARES OF SUBSIDIARY COMPANIES WHICH ARE DEFINITELY NOT FOR THE PURPOSE OF EARNING EXEMPT INCOME. RELIANCE WAS PLACED IN THE CASE OF PROMAIN LIMITED ., ITA NO. 3349 /DEL/201 1 AN D THE DECISION OF THE KOLKATA TRIBUNAL IN THE CASE OF REI AGRO LTD., ITA NO. 1331/KOL/2011 , WHEREIN IT WAS HELD THAT STRATEGIC INVESTMENT HAS TO BE EXCLUDED FOR THE PURPOSE OF ARRIVING AT DISALLOWANCE UNDER RULE 8D(III). THE TRIBUNAL HAD RELIED UPON THE FIN DINGS OF KOLKATTA TRIBUNAL IN THE CASE OF REI AGRO LTD. V.DCIT IN I.T.A. NO./ 1331/DEL/2011 DATED 29.7.2011. THE RELEVANT PORTION OF TRIBUNAL FINDINGS AS CONTAINED IN THE KOLKATTA TRIBUNAL ARE REPRODUCED BELOW: - (III) FURTHER IN RULE 8D(2)(II), THE WORDS USED IN NUMERATOR B ARE THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT FORM OR SHALL NOT FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHEET AS ON THE FIRST DAY AND IN THE LAST DAY OF THE PREVIOUS YEAR. THE ASSESSING OFFICER WAS WRONG IN TAKING INTO CONSIDERATION THE INVESTMENT OF RS. 103 CRORES MADE DURING THE YEAR WHICH HAS NOT EARNED ANY DIVIDEND OR EXEMPT INCOME. IT IS ONLY THE AVERAGE OF THE VALUE OF THE INVESTMENT FROM WHICH THE INCOME HAS BEEN EARNED WHICH IS NOT FALLING WITHIN THE PART OF THE TOTAL INCOME THAT IS TO BE CONSIDERED. THUS, I T IS NOT THE TOTAL INVESTMENT AT ALL BEGINNING OF THE YEAR AND AT THE END OF THE YEAR, WHICH IS TO BE CONSIDERED BUT IT IS THE AVERAGE OF THE VALUE OF INVESTMENTS WHICH HAS GIVEN RISE TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME WHICH IS TO BE CONSIDERED. THE TERM AVERAGE OF THE VALUE OF INVESTMENT IS USED TO TAKE CARE OF CASES WHERE THERE IS THE ISSUE OF DIVIDEND STRIPING. IV) UNDER RULE 8D(2)(III), WHAT IS DISALLOWABLE IS AN AMOUNT EQUAL TO PERCENTAGE OF THE AVERAGE VALUE OF INVESTMENT THE INCOME FROM ITA NO S . 5989&5978/12 13 WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME/. THUS, UNDER SUB CLAUSE (III), WHAT IS DISALLOWED IS PERCENTAGE OF THE NUMERATOR B IN RULE 8D(2) (I II). THIS H AS TO BE CALCULATED ON THE SAME LINES AS MENTIONED EARLIER IN RESPECT OF NUMERATOR B IN THE RULE 8D(2)(II). THUS, NOT ALL INVESTMENTS BECOME THE SUBJECT MATTER OF CONSIDERATION WHEN COMPUTING DISALLOWANCE U/S 14AREAD WITH RULE 8D. THE DISALLOWANCE U/S 14A READ WITH RULE 8D IS TO BE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND THIS CAN BE DONE ONLY BY TAKING INTO CONSIDERATION THE INVESTMENT WHICH HAS GIVEN RISE TO THIS INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. (A.Y. ) (I.T.A.NO.1331/KOL/2011 DATED 29.7.2011. FOLLOWING THE ABOVE JUDICIAL PRECEDENTS, IT WAS CONTENDED THAT VALUE OF STRATEGIC INVESTMENTS SHOULD BE EXCLUDED FOR THE PURPOSE OF DISALLOWANCE UNDER RULE 8D(III) . 16. WE HAVE CONSIDERED RIVAL CONTENTIONS, CARE FULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND THAT AFTER ANALYZING EACH INVESTMENT, THE CIT(A) HAS COMPUTED THE DISALLOWANCE U/S.14A AT RS. 4,10,462/ - IN PLACE OF RS.6,10,706/ - WORKED OUT BY THE AO. THE WORKING GIVEN BY THE CIT(A) IS AS P ER MATERIAL ON RECORD AND DOES NOT REQUIRE ANY INTERFERENCE ON OUR PART. 17 . IN THE RESULT, BOTH APPEAL S OF REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 14/01 / 201 5 . 14/01 / 201 5 SD/ - SD/ - ( ) ( JOGINDER SINGH ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 14/01 /201 5 /P KM , PS COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A), MUMBAI. ITA NO S . 5989&5978/12 14 / BY ORDER, ( ASSTT. REGISTRAR) / I TAT, MUMBAI 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//