ITO 10(1)-4, MUMBAI V. BEKAY PROPERTIES P. LTD, MUMBAI

ITA 5999/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 56236 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 02-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P C MAURYA
• Keywords: Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, B, MUMBAI BEFORE SHRI R.S. SYAL (A.M.) AND SHRI D.K.AGARWAL (J M) ITA NO.5999/MUM/2010 (ASSESSMENT YEAR: 2007-08) INCOME TAX OFFICER, 10(1)(4), ROOM NO.475, 4 TH FLOOR, AAYAKAR BHAVAN, M K ROAD, CHURCHGATE, MUMBAI-400020 M/S BEKAY PROPERTIES P LTD., 603, 6 TH FLOOR, KESHAVA, BANDRA- KURLA- COMPLEX, BANDRA (E), MUMBAI-400051 PAN:AACCB7960P APPELLANT V/S RESPONDENT DATE OF HEARING : 14.12.2011 DATE OF PRONOUNCEMENT : 16.12.2011 APPELLANT BY : SHRI P.C.MAURYA RESPONDENT BY : NONE O R D E R PER D.K.AGARWAL (JM) THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 31.05.2010 PASSED BY THE LD.CIT(A) FOR THE ASSESSMENT YEAR 2007-08. 2. THE ASSESSEE VIDE LETTER DATED 12.12.2011 SOUGHT ADJOURNMENT FOR ONE MONTH ON THE GROUND THAT HE IS IN PROCESS OF TAKING LEGAL ADVICE. IN THE ABSENCE OF A NY SUPPORTING MATERIAL PLACED ON RECORD BY THE ASSESSE E ITA NO.5999/MUM/2010 (ASSESSMENT YEAR: 2007-08) 2 THE ADJOURNMENT PETITION FILED BY THE ASSESSEE WAS REJECTED BY THE BENCH AND IT WAS DECIDED TO DISPOS E OF THE APPEAL EX-PARTE QUA THE ASSESSEE ON MERITS AFTER HEARING THE LD. DR. 3. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSESSEE FIRM IS ENGAGED IN THE SERVICE SECTOR, FIL ED RETURN DECLARING TOTAL INCOME AT RS.NIL. DURING THE YEAR UNDER CONSIDERATION, THE AO NOTED THAT THE ASSESSEE IS A CLOSELY HELD PRIVATE LIMITED COMPANY. MR.BALA V. KUTTY, DIRECTOR HELD MORE THAN 20% BENEFICIAL INTEREST (99%) IN ASSESSEES INCOME AND EQUITY CAPITAL. THE AO FROM THE SUBMISSIONS OF THE ASSESSEE FURTHER NOTED THAT THE ASSESSEE RECEIVED RS.2,50,000/- FROM M/S. SUBHUTHI INVESTMENT P LTD. AND RS.8,00,000/- FROM M/S. LOYAL CREDIT AND INVESTMENT P LTD. AS NON-INTEREST BEARING LOAN DURI NG THE YEAR ENDED ON 31.3.2007. MR.BALA V. KUTTY, DIRECTOR OF THE ASSESSEE COMPANY HELD MORE THAN 10% BENEFICIAL INTEREST IN BOTH LENDING COMPANIES I.E. 90% IN M/S. SUBHUTHI INVESTMENTS P LTD. AND 76% IN M/S . LOYAL CREDIT AND INVESTMENTS P LTD. INCOME AND EQUITY CAPITAL WITH VOTING RIGHTS. THE ACCOUNTS OF ITA NO.5999/MUM/2010 (ASSESSMENT YEAR: 2007-08) 3 DONORS WERE SHOWN UNDER THE HEAD LOANS & ADVANCES. THE ASSESSEE BOOKS OF ACCOUNT SHOWED CREDIT ENTRIES OF RECEIPT OF MONEY IN THE BANK ACCO UNT FROM THOSE COMPANIES. THE A.O. ALSO NOTED THAT TH E LENDERS HAD ADVANCED LOAN TO THE ASSESSEE AND AT T HE YEAR END THE ASSESSEES BOOKS SHOWED RECEIVABLE OF RS.5,07,500/- FROM M/S. LOYAL CREDIT AND INVESTMENT S P LTD DUE TO OVER-REPAYMENT FOR WHATEVER REASONS WHEREAS THE LOAN OF THE M/S. SUBHUTHI INVESTMENTS P LTD STOOD AS PAYABLE AT RS.2,50,000/-. IT WAS FURTH ER OBSERVED THAT IN BOTH THE COMPANIES, THE DIRECTORS/MEMBERS OF THE ASSESSEE WERE HAVING SUBSTANTIAL INTERESTS AT THE BEGINNING OF THE YEAR . HE FURTHER NOTED THAT BALANCE SHEET DISCLOSED THAT LE NDER M/S. SUBHUTHI INVESTMENTS P LTD. HAD GENERAL RESERV E FROM THE ACCUMULATED PROFITS OF RS.5,51,727/- AS ON 31.03.06 AND RS.28,80,920/- AS ON 31.03.2007 AS CARRIED FORWARD FROM THE P&L A/C. THE BALANCE SHEE T OF THE OTHER LENDER COMPANY M/S. LOYAL CREDIT AND INVESTMENTS P LTD. DISCLOSED THAT IT HAD GENERAL RESERVE FROM THE ACCUMULATED PROFITS OF RS.3,11,87,600/- AS ON 31.3.06 AND RS.3,33,48,876/- AS ON 31.3.2007 AS CARRIED FORWARD FROM THE P&L A/C . ITA NO.5999/MUM/2010 (ASSESSMENT YEAR: 2007-08) 4 THUS, THE AO OBSERVED THAT THE MONEY HAD BEEN ADVANCED TO ASSESSEE BY A COMPANY IN WHICH ASSESSEES MEMBERS HELD MORE THAN 20% EQUITY. THUS, THE LOAN TAKEN BY THE ASSESSEE FROM M/S. SUBHUTHI INVESTMENTS P LTD. AND M/S. LOYAL CREDIT A ND INVESTMENTS P LTD. ATTRACTS THE PROVISIONS OF SECTI ON 2(22)(E) OF INCOME TAX ACT, 1961 (IN SHORT THE ACT) WHEREIN THE DIVIDEND WAS DEFINED INCLUSIVELY. THE A .O. FURTHER OBSERVED THAT THE AMOUNT WAS RECEIVED IN ASSESSEES ACCOUNT FOR APPLICATION AS DESIRED BY TH E ASSESSEE. IT IS NOT FOR THE BUSINESS APPLICATION OF THE DONOR. IT HAS BEEN SHOWN AS LOAN UNDER THE HEAD LOANS AND ADVANCES OF THE COMPANY. ACCORDINGLY T HE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY MONEY RECEIVED FROM THE LENDER COMPANY DURING THE YEAR SHOULD NOT BE TREATED AS DIVIDEND IN TERMS OF SECT ION 2(22)(E) OF THE ACT. THE ASSESSEE EXPLAINED THAT IT WAS NOT A SHARE HOLDER IN THE LENDER COMPANIES AND HENCE THE PROVISIONS OF SECTION 2(22)(E) ARE NOT APPLICABLE. THE A.O. DID NOT AGREE WITH THE ASSESSE ES ARGUMENT THAT SINCE, IT WAS NOT SHAREHOLDER IN THE LENDER COMPANIES, THEREFORE, THE PROVISIONS OF SECT ION 2(22)(E) ARE NOT APPLICABLE. THE A.O. HELD THAT THE ITA NO.5999/MUM/2010 (ASSESSMENT YEAR: 2007-08) 5 AMOUNT RECEIVED WAS LOAN AND THE DONORS DID POSSESS ACCUMULATED PROFITS ON THE DATE OF PAYMENT OF LOAN TO THE ASSESSEE AND THE AMOUNT OF MONEY ADVANCED WAS NOT IN THE ORDINARY COURSE OF BUSINESS OF LENDERS. THE AMOUNT WAS NOT COVERED BY ANY OF THE FIVE EXCEPTION S PROVIDED BELOW S. 2(22)(E). THUS, THE AO TREATED TH E LOAN RECEIVED FROM M/S. SUBHUTHI INVESTMENTS P LTD. AND M/S. LOYAL CREDIT AND INVESTMENTS P LTD. AS DEEMED DIVIDEND. THE LEGAL FICTION CAME INTO PLAY A S SOON AS THE MONIES WERE PAID BY THE COMPANIES TO TH E ASSESSEE. THE A.O. FURTHER HELD THAT THE ASSESSEE MUST BE DEEMED TO HAVE RECEIVED DIVIDENDS ON THE DATES ON WHICH ASSESSEE WITHDREW THE AFORESAID AMOUNTS FROM THE LENDER COMPANIES. THE LOAN OR ADVANCE TAKEN FROM THE LENDER COMPANIES MAY HAVE BEEN ULTIMATELY REPAID OR ADJUSTED, BUT THAT WILL N OT ALTER THE POSITION, IN THE EYE OF LAW. THE A.O. CONCLUDED THAT THE ASSESSEE HAD RECEIVED DIVIDEND I.E. DEEMED DIVIDEND FROM THE LENDER COMPANIES DURING THE RELEVANT ACCOUNTING PERIOD AND ACCORDING LY HE ADDED RS.10,50,000/- AS DEEMED DIVIDEND TO THE TOTAL INCOME OF THE ASSESSEE UNDER THE HEAD INCOME FROM OTHER SOURCES. ITA NO.5999/MUM/2010 (ASSESSMENT YEAR: 2007-08) 6 4. ON APPEAL, THE LD. CIT(A), FOLLOWING THE DECISIO N OF THE SPECIAL BENCH OF THE TRIBUNAL IN BHAUMIK COLOURS (P) LTD. (2009) 18 DTR (MUMBAI) (TRIB) 451/ (2009) 118 ITD 1 (MUM.) (SB) DELETED THE ADDITION MADE BY THE AO. 5. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE REVENUE IS IN APPEAL BEFORE US TAKING THE FOLLO WING GROUND: 1. ON FACTS AND IN THE CIRCUMSTANCE OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE ADDITION OF RS.10,50,000/- ASSESSED IN THE HANDS OF THE ASSESSEE AS DIVIDEND U/S 2(22)(E) OF THE I T ACT 1961, ON THE GROUND THAT ASSESSEE IS NOT SHARE HOLDER OF THE LENDING COMPANIES, IGNORING THE STATUTORY PROVISIONS TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST ENACTED IN THE SECOND LIMB OF S. 2(22)(E) OF THE I T ACT 1961 BY FINANCE ACT 1987 AND THE LEGISLATIVE INTEND EXPLAINED IN THE MEMORANDUM TO TAX SUCH INCOME IN THE HANDS OF ASSESSEE CONCERN ESPECIALLY WHEN THE ASSESSEE FULFILLED ALL THE CONDITIONS OF CLAUSE (A) TO EXPLANATION 3 TO S. 2(22) FOR BEING A CONCERN LIABLE TO CHARGE OF TAX ON DIVIDEND INCOME U/S 2(22)(E) OF THE IT ACT 1961. 6. AT THE TIME OF HEARING THE LD. DR WHILE RELYING ON THE ORDER OF THE AO SUBMITS THAT IN VIEW OF THE RE CENT DECISION OF THE HONBLE DELHI HIGH COURT IN CIT V/S NATIONAL TRAVEL SERVICES(DELHI) (2011)202 TAXMAN ITA NO.5999/MUM/2010 (ASSESSMENT YEAR: 2007-08) 7 327/14 TAXMANN.COM 14 (DELHI), THE PROVISIONS OF SECTION 2(22)(E) ARE ATTRACTED IN THIS CASE AND THEREFORE, THE ORDER PASSED BY THE LD. CIT(A) BE REVERSED AND THAT OF THE AO BE RESTORED. 7. WE HAVE CAREFULLY HEARD THE SUBMISSIONS OF THE LD. DR AND PERUSED THE MATERIAL AVAILABLE ON RECORD . WE FIND THAT THE FACTS ARE NOT IN DISPUTE INASMUCH AS IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE IS NEIT HER REGISTERED SHAREHOLDER NOR BENEFICIAL SHAREHOLDER I N THE LENDER COMPANIES. 8. IN BHAUMIK COLOUR PVT.LTD.(SB) (SUPRA), IT HAS BEEN HELD (PARA 41, AT PAGE 27 OF 118 ITD): ON THE FIRST QUESTION : DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THAN SHAREHOLDER. ON THE SECOND QUESTION: THE EXPRESSION SHAREHOLDER REFERRED TO IN SECTION 2(22)(E) REFER S TO BOTH A REGISTERED SHAREHOLDER AND BENEFICIAL SHAREHOLDER. IF A PERSON IS REGISTERED SHAREHOLDER BUT NOT THE BENEFICIAL SHAREHOLDER THEN THE PROVISIONS OF SECTION 2(22)(E) WILL NOT APPLY. 9. IN CIT V/S UNIVERSAL MEDICARE PRIVATE LIMITED (2010)324 ITR 263 (BOM), THEIR LORDSHIPS AFTER ITA NO.5999/MUM/2010 (ASSESSMENT YEAR: 2007-08) 8 CONSIDERING THE AFORESAID DECISION OF THE SPECIAL B ENCH OF THE TRIBUNAL HAS HELD (PAGE 269, PLACITUM 10): ..THE DEFINITION DOES NOT ALTER THE LEGAL POSITION THAT DIVIDEND HAS TO BE TAXED IN THE HANDS OF THE SHARE- HOLDER. CONSEQUENTLY IN THE PRESENT CASE THE PAYMENT, EVEN ASSUMING THAT IT WAS A DIVIDEND, WOULD HAVE TO BE TAXED NOT IN THE HANDS OF THE ASSESSEE BUT IN THE HANDS OF THE SHAREHOLDER. THE TRIBUNAL WAS, IN THE CIRCUM- STANCES, JUSTIFIED IN COMING TO THE CONCLUSION THAT , IN ANY EVENT, THE PAYMENT COULD NOT BE TAXED IN THE HANDS OF THE ASSESSEE. WE MAY IN CON- CLUDING NOTE THAT THE BASIS ON WHICH THE ASSESSEE IS SOUGHT TO BE TAXED IN THE PRESENT CASE IN RESPECT OF THE AMOUNT OF RS. 32,00,000 IS THAT THERE WAS A DIVIDEND UNDER SECTION 2(22)(E) AND NO OTHER BASIS HAS BEEN SUGGESTED IN THE ORDER OF THE ASSESSING OFFICER. 10. IN CIT V/S NATIONAL TRAVEL SERVICES(DELHI) (2011)202 TAXMAN 327/14 TAXMANN.COM 14 (DELHI) RELIED ON BY THE LD.DR IT HAS BEEN OBSERVED (PAGE 327): THE ASSESSEE-FIRM CONSISTED OF THREE PARTNERS HAVING PROFIT SHARING RATIO OF 35 PER CENT, 15 PER CENT AND 50 PER CENT. IT HAD TAKEN LOAN OF CERTAIN AMOUNT FROM A COMPANY. IN THAT COMPANY, THE ASSESSEE HELD 48.18 PER CENT EQUITY SHARES HOWEVER THE SHARES WERE PURCHASED IN THE NAME OF TWO PARTNERS AND THE ASSESSEE WAS THE BENEFICIAL SHAREHOLDER. ADMITTEDLY, FOR ATTRACTING FIRST LIMB OF SECTION 2(22)(E), THE REQUIREMENT IS THAT THE PAYMENT IS MADE BY A COMPANY BY WAY OF ADVANCE OR LOAN TO A SHARE HOLDER, BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES. THE QUESTION WHICH CALLS FOR INTERPRETATION IN THE ITA NO.5999/MUM/2010 (ASSESSMENT YEAR: 2007-08) 9 INSTANT CASE IS AS TO WHETHER FOR ATTRACTING FIRST LIMB OF SECTION 2(22)(E) IT IS NECESSARY THAT BOTH THE CONDITIONS HAVE TO BE SATISFIED, NAMELY, SUCH A PERSON TO WHOM THE PAYMENT IS MADE IS NOT ONLY A REGISTERED SHAREHOLDER BUT A BENEFICIAL SHAREHOLDER AS WELL. THE ASSESSEE CONTENDED THAT ONLY THAT BENEFICIAL OWNER WHOSE NAME IS ENTERED AS BENEFICIAL OWNER IN THE RECORDS OF THE DEPOSITORY, WOULD BE DEEMED TO BE A MEMBER OF THE CONCERNED COMPANY AND UNLESS THIS CONDITION IS SATISFIED SECTION 2(22)(E) CANNOT BE APPLIED. IT HAS BEEN HELD (PARA 23, PAGE 340 OF 202 TAXMAN) : 23. WE ARE, THEREFORE, OF THE OPINION THAT FOR TH E PURPOSE OF SECTION 2(22)(E) OF THE ACT, PARTNERSHIP FIRM IS TO BE TREATED AS THE SHAREHOLDER AND IT IS NOT NECESSARY THAT IT HAS TO BE REGISTERED SHAREHOLDER. WE THUS ANSWER THE QUESTIONS FORMULATED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE AS A RESULT, THIS APPEAL IS ALLOWED SETTING ASIDE THE ORDER OF THE TRIBUNAL AND RESTORING THAT OF THE ASSESSING OFFICER. 11. WHEREAS IN THE CASE BEFORE US, IT IS A CASE OF THE COMPANY AND NOT THE CASE OF THE PARTNERSHIP FIRM. THEREFORE, THE DECISION RELIED UPON BY THE LD. DR I S DISTINGUISHABLE AND NOT APPLICABLE TO THE PRESENT C ASE. 12. IN THE ABSENCE OF ANY OTHER CONTRARY DECISION O R DISTINGUISHING FEATURE BROUGHT ON RECORD BY THE LD. D.R., WE, RESPECTFULLY FOLLOWING THE CONSISTENT VIE W I.E DECISIONS OF THE HONBLE JURISDICTIONAL HIGH COURT ITA NO.5999/MUM/2010 (ASSESSMENT YEAR: 2007-08) 10 (SUPRA) AND THE SPECIAL BENCH OF THE TRIBUNAL (SUPR A), HOLD THAT THE PROVISIONS OF SEC. 2(22)(E) ARE NOT APPLICABLE IN THE CASE OF THE ASSESSEE COMPANY AND, ACCORDINGLY, THE GROUNDS TAKEN BY THE REVENUE ARE REJECTED. 13. IN THE RESULT, THE REVENUES APPEAL STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH DEC.,2011. SD SD ( R.S. SYAL) (D.K.AGARWAL) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, 16TH DECEMBER, 2011 SRL: COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT CONCERNED 4. CIT(A) CONCERNED 5. DR CONCERNED BENCH 6. GUARD FILE. BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUMBAI