M/s Nitesh Infrastructure Private Limited, Bangalore V. CIT, Bangalore

ITA 727/BANG/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0656 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-02-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 23-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA CITI
• Assessee Lawyers: S VENKATESAN
• Keywords: Opportunity of being heard; Deemed dividend
• Section: 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER ITA NO.727/BANG/2012 ASSESSMENT YEAR : 2007-08 M/S. NITESH INFRASTRUCTURE PRIVATE LTD., # 107, 1 ST FLOOR, ANDREWS BUILDING, M.G. ROAD, BANGALORE 560 001. PAN : AACCN 2872N VS. THE COMMISSIONER OF INCOME-TAX-III, BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI S. VENKATESAN, C.A. RESPONDENT BY : SHRI S.K. AMBASTHA, CIT-I (DR) DATE OF HEARING : 20.02.2013 DATE OF PRONOUNCEMENT : 20.02.2013 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 30.03.2012 OF THE COMMISSIONER OF INCOME-TAX-III, BANGALORE [HERE INAFTER REFERRED TO AS THE CIT] PASSED U/S. 263 OF THE ACT. THE CIRCUMS TANCES UNDER WHICH THE ORDER U/S. 263 WAS PASSED BY THE CIT ARE AS FOLLOWS . ITA NO.727/BANG/2012 PAGE 2 OF 6 2. THE ASSESSEE, NITESH INFRASTRUCTURE PVT. LTD. [ NIPL ] IS A COMPANY ENGAGED IN THE BUSINESS OF CARRYING OUT CONTRACT WO RK FOR CONSTRUCTION OF BUILDINGS, INFRASTRUCTURE PROJECTS, ETC. THE ASSES SEE RECEIVED A SUM OF RS.1.18 CRORES AS LOAN/ADVANCE FROM M/S. NITESH EST ATES PVT. LTD. [ NEL ]. THE CIT WAS OF THE VIEW THAT SINCE THE COMPANIES NI PL AND NEL HAD A COMMON DIRECTOR HOLDING SUBSTANTIAL INTEREST IN BOT H NIPL AND NEL, A SUM OF RS.1.18 CRORES RECEIVED AS LOAN/ADVANCE FROM NEL OUGHT TO HAVE BEEN TREATED AS DEEMED DIVIDEND IN THE HANDS OF THE ASSE SSEE FOR THE A.Y. 2007-08 IN VIEW OF THE PROVISIONS OF SECTION 2(22)( E) OF THE ACT. THE AO PASSED AN ORDER OF ASSESSMENT IN THE CASE OF THE AS SESSEE ON 18.12.2009 FOR THE A.Y. 2007-08 IN WHICH HE HAD NOT MADE THE A DDITION U/S. 2(22)(E) OF THE ACT. THE CIT ACCORDINGLY ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE, NIPL, U/S. 263 OF THE ACT CALLING UPON THE ASSESSEE TO SHOW CAUSE AS TO WHY A SUM OF RS.1.18 CRORES SHOULD NOT BE ADDED AS DEEMED DIVIDEND U/S. 2(22)(E) OF THE ACT TO THE TOTAL INCOME OF THE ASSE SSEE AND TO THAT EXTENT ORDER OF THE AO DATED 18.12.2009 BE NOT REVISED. 3. IN REPLY TO THE SHOW CAUSE NOTICE, THE ASSESSEE, NIPL, TOOK THE STAND THAT THE AMOUNT IN QUESTION WAS RECEIVED AS A DVANCE FOR CONSTRUCTION OF BUILDING VIZ., NITESH FOREST HILLS AT SEEGEHALLI VILLAGE WHITE FIELD, BANGALORE. THE CLAIMED THAT THE AMOUNT WAS RECEIVE D IN THE NORMAL COURSE OF BUSINESS OF THE ASSESSEE AND THEREFORE TH E PROVISIONS OF SECTION 2(22)(E) OF THE ACT WILL NOT APPLY. 4. THE CIT CALLED FOR A REMAND REPORT ON THE SUBMIS SIONS MADE BY THE ASSESSEE AS AFORESAID. IN THE REMAND REPORT, THE A O HIGHLIGHTED THAT THERE ITA NO.727/BANG/2012 PAGE 3 OF 6 WERE ADVANCES RECEIVED BY THE ASSESSEE FROM NEL FOR EXECUTION OF CONTRACTS ON WHICH TDS HAD BEEN MADE. APART FROM T HOSE PAYMENTS, THE ASSESSEE HAD ALSO RECEIVED A SUM OF RS.1.18 CRORES ON WHICH NO TDS HAD BEEN DONE AND IT IS ONLY IN RESPECT OF THIS SUM THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT ARE SOUGHT TO BE INVOKED. 5. THE CIT ON CONSIDERATION OF THE REMAND REPORT AN D IN THE LIGHT OF THE FACT THAT THERE WAS NO APPARENT BUSINESS PURPOSE FO R THE SUM OF RS.1.18 CRORES (WITHOUT TDS) RECEIVED FROM NEL, HELD THAT T HE PROVISIONS OF 2(22)(E) OF THE ACT WERE CLEARLY ATTRACTED. ACCOR DINGLY, THE CIT PASSED AN ORDER U/S. 263 OF THE ACT DIRECTING THE AO TO MAKE AN ADDITION OF RS.1.18 CRORES TO THE TOTAL INCOME OF THE ASSESSEE AS DEEME D DIVIDEND U/S. 2(22)(E) OF THE ACT. 6. AGGRIEVED BY THE ORDER OF THE CIT, THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 7. IN GROUND NO.6, THE ASSESSEE HAS SUBMITTED AS FO LLOWS:- THE LEARNED CIT FAILED TO APPRECIATE THAT THE APPE LLANT IS NOT EVEN A SHAREHOLDER OF M/S. NITESH ESTATES PRIVATE L IMITED AND CONSEQUENTLY, THE APPELLANT IS NOT LIABLE TO BE ASS ESSED EVEN IN EXTREME CASE FOR DEEMED DIVIDEND 2(22)(E) OF THE AC T, HAVING REGARD TO THE RATIO OF THE DECISIONS OF THE HONBLE DELHI HIGH COURT IN THE CASE OF ANKITECH PRIVATE LIMITED REPOR TED IN 340 ITR 14, RAJASTHAN HIGH COURT IN THE CASE OF HOT EL HILLTOP REPORTED IN 313 ITR 16 AND BOMBAY HIGH COUR T IN THE CASE OF UNIVERSAL MEDICAL PVT. LTD., REPORTED IN 32 4 ITR 263. 8. WE HAVE CONSIDERED THE STAND TAKEN BY THE ASSESS EE IN GROUND NO.6 AND WE FIND THAT IN THE ORDER U/S. 263 OF THE ACT AS WELL AS REMAND ITA NO.727/BANG/2012 PAGE 4 OF 6 REPORT FILED BEFORE THE CIT, IT IS CLEARLY MENTIONE D THAT THE ASSESSEE, NIPL AND NEL HAVE A COMMON DIRECTOR, WHO HELD SUBSTANTIA L INTEREST IN BOTH NIPL AND NEL. IT IS CLEAR FROM THE ABOVE THAT THE ASSESSEE WAS NOT A SHAREHOLDER IN NEL. IN SUCH CIRCUMSTANCES, THE QUE STION THAT ARISES FOR CONSIDERATION IS AS TO WHETHER THE PROVISIONS OF SE CTION 2(22)(E) OF THE ACT CAN BE APPLIED? THIS ISSUE HAD BEEN CONSIDERED BY THE SPECIAL BENCH OF THE ITAT MUMBAI BENCH IN THE CASE OF ACIT V. BHOUMIK COLOUR PVT. LTD., 313 ITR (AT) 146 (MUM) (SB) . THE FACTS OF THE CASE BEFORE THE SPECIAL BENCH WAS THAT THE ASSESSEE COMPANY TOOK LOAN FROM COMPANY UPPL. THE ASSESSEE WAS NOT A SHAREHOLDER OF UPPL BUT ONE N TRUST HELD 20% SHARES IN THE ASSESSEE COMPANY AND THE SAME N TRUST ALSO HELD 10% SHARES IN UPPL. THE QUESTION BEFORE THE SPECIAL BE NCH WAS AS TO WHETHER THE LOAN CAN BE TREATED AS DEEMED DIVIDEND WITHIN T HE MEANING OF SEC.2(22)(E) OF THE ACT. THE SPECIAL BENCH HELD AS FOLLOWS: 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 A SHAREHOLDER. THE PROVISIONS O F S. 2(22)(E) DO NOT SPELL OUT AS TO WHETHER THE INCOME HAS TO BE TA XED IN THE HANDS OF THE SHAREHOLDER OR THE CONCERN (NON-SHAREHOLDER) . THE PROVISIONS ARE AMBIGUOUS. IT IS THEREFORE NECESSARY TO EXAMINE THE INTENTION BEHIND ENACTING THE PROVISIONS OF S. 2(22 )(E). THE INTENTION BEHIND ENACTING PROVISIONS OF S. 2(22)(E) IS 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 ACCUMULATED PR OFITS WOULD NOT DISTRIBUTE SUCH PROFIT AS DIVIDEND BECAUSE IF S O DISTRIBUTED THE DIVIDEND INCOME WOULD BECOME TAXABLE IN THE HANDS O F THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED P ROFITS AS DIVIDEND, COMPANIES DISTRIBUTE THEM AS LOAN OR ADVA NCES TO SHAREHOLDERS OR TO CONCERN IN WHICH SUCH SHAREHOLDE RS 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 TREATED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF S. 2(22)(E) IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDER. THE DEEMI NG PROVISION AS IT APPLIES TO THE CASE OF LOANS OR ADVANCES BY A CO MPANY TO A CONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL IN TEREST IS BASED ON THE PRESUMPTION THAT THE LOAN OR ADVANCES WOULD ULTIMATELY BE ITA NO.727/BANG/2012 PAGE 5 OF 6 MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY G IVING THE LOAN OR ADVANCE. THE INTENTION OF THE LEGISLATURE IS THE REFORE TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDER AND N OT IN THE HANDS OF THE CONCERN. THE BASIS OF BRINGING IN THE AMENDM ENT TO S. 2(22)(E) BY THE FINANCE ACT, 1987, W.E.F 1ST APRIL, 1988 IS TO ENSURE THAT PERSONS WHO CONTROL THE AFFAIRS OF A CO MPANY AS WELL AS THAT OF A FIRM CAN HAVE THE PAYMENT MADE TO A CONCE RN FROM THE COMPANY AND THE PERSON WHO CAN CONTROL THE AFFAIRS OF THE CONCERN CAN DRAW THE SAME FROM THE CONCERN INSTEAD OF THE C OMPANY DIRECTLY MAKING PAYMENT TO THE SHAREHOLDER AS DIVID END. THE SOURCE OF POWER TO CONTROL THE AFFAIRS OF THE COMPA NY AND THE CONCERN IS THE BASIS ON WHICH THESE PROVISIONS HAVE BEEN MADE. IT IS THEREFORE PROPER TO CONSTRUE THOSE PROVISIONS AS CONTEMPLATING A CHARGE TO TAX IN THE HANDS OF THE SHAREHOLDER AND N OT IN THE HANDS OF A NON-SHAREHOLDER VIZ., CONCERN. A LOAN OR ADVAN CE RECEIVED BY A CONCERN IS NOT IN THE NATURE OF INCOME. IN OTHER WO RDS THERE IS A DEEMED ACCRUAL OF INCOME EVEN UNDER S. 5(1)(B) IN T HE HANDS OF THE SHAREHOLDER ONLY AND NOT IN THE HANDS OF THE PA YEE VIZ., NON- SHAREHOLDER (CONCERN). SEC. 5(1)(A) CONTEMPLATES TH AT THE RECEIPT OR DEEMED RECEIPT SHOULD BE IN THE NATURE OF INCOME . THEREFORE, THE DEEMING FICTION CAN BE APPLIED ONLY IN THE HAND S OF THE SHAREHOLDER AND NOT THE NON-SHAREHOLDER VIZ., THE C ONCERN. CBDT CIRCULAR NO. 495, DT. 22ND SEPT., 1987, TO THE EXTE NT NOT BENEVOLENT IS NOT BINDING. IN THE EVENT OF THE PAYM ENT OF LOAN OR ADVANCE BY A COMPANY TO A CONCERN BEING TREATED AS DIVIDEND AND TAXED IN THE HANDS OF THE CONCERN THEN, THE BENEFIT OF SET OFF AS PER S. 2(22)(E)(III) CANNOT BE ALLOWED TO THE CONCERN, BECAUSE THE CONCERN CAN NEVER RECEIVE DIVIDEND FROM THE COMPANY WHICH IS ONLY PAID TO THE SHAREHOLDER, WHO HAS SUBSTANTIAL INTERE ST IN THE CONCERN. THE PROVISIONS OF SUB-CL. (III) OF S. 2(22 )(E) ALSO THEREFORE CONTEMPLATE DEEMED DIVIDEND BEING TAXED IN THE HAND S OF A SHAREHOLDER ONLY. 9. THE AFORESAID VIEW EXPRESSED BY THE SPECIAL BENC H HAS BEEN APPROVED BY THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF CIT V. UNIVERSAL MEDICAL PVT. LTD. (SUPRA) AND THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. ANKITECH PVT. LTD. (SUPRA) . 10. WE FIND THAT THE ABOVE ASPECT HAS NOT BEEN HIGH LIGHTED BY THE ASSESSEE IN THE PROCEEDINGS U/S. 263 OF THE ACT. W E ARE, THEREFORE, OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO SET A SIDE THE ORDER OF THE LD. CIT AND DIRECT THE LD. CIT TO EXAMINE THE FACTUAL P OSITION REGARDING THE SHAREHOLDING BY THE ASSESSEE IN NEL. HE WILL CONSI DER THE ISSUE AFRESH IN ITA NO.727/BANG/2012 PAGE 6 OF 6 THE LIGHT OF THE DECISIONS REFERRED TO ABOVE, AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 11. THE APPEAL OF THE ASSESSEE IS ACCORDINGLY TREAT ED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 20 TH DAY OF FEBRUARY, 2013. SD/- SD/- ( N. BARATHVAJA SANKAR ) ( N.V. VASU DEVAN ) VICE PRESIDENT JUDIC IAL MEMBER BANGALORE, DATED, THE 20 TH FEBRUARY, 2013. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. DR, ITAT, BANGALORE. 5. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.