M/s Namdari Seeds, Bangalore V. DCIT, Bangalore

ITA 802/BANG/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5577 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 18-05-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 16-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Question of law; Deemed dividend
• Section: 143(3); 80HHC; 2(22)(e); 148; 56

Judgement Text

PAGE 1 OF 14 ITA NOS.802 & 864/BANG/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B' BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, J.M. ITA NO.802/BANG/2010 (ASST. YEAR 2003-04) M/S NAMDHARI SEEDS, NO.119, 9 TH MAIN, IDEAL HOME TOWNSHIP, RAJARAJESWARINAGAR, BANGALORE-98. - APPELLANT VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2(1), BANGALORE. - RESPONDENT ITA NO.864/BANG/2010 (ASST. YEAR 2003-04) (BY REVENUE) ASSESSEE BY : SHRI H N KHINCHA, C.A. RESPONDENT BY : SHRI HARSHA PRAKASH, CIT-II O R D E R PER GEORGE GEORGE : THESE APPEALS OF THE ASSESSEE AS WELL AS THE REVE NUE ARE DIRECTED AGAINST THE ORDER OF THE CIT(A)-I, BAN GALORE DATED 27.4.2010 IN RELATION TO ASST. YEARS 2003-04. PAGE 2 OF 14 ITA NOS.802 & 864/BANG/2010 2 ITA NO.802/BANG/2010 (ASSESSEES APPEAL) 2. THE BRIEF FACTS OF THE CASE ARE AS FOLLOWS:- THE ASSESSEE FIRM IS A PRODUCER AND EXPORTER OF VEGETABLE SEEDS, FRUIT SEEDS, FLOWER SEEDS AND FRES H VEGETABLES. THE ASSESSEE FILED ITS RETURN OF INCOME ON 29.8.200 3 DECLARING AN INCOME OF RS.22,32,814/- AFTER CLAIMING DEDUCTION U /S 80HHC AT RS.7,92,073/- AND EXEMPTION U/S 10(1) AT RS.2,61,66 ,179/-. THE CASE OF THE ASSESSEE FOR THE CONCERNED ASST. YEAR WA S SELECTED FOR SCRUTINY AND ORDER U/S 143(3) RWS 148 OF THE ACT WAS PASSED ON 31.12.2008. THE AO, IN THE SCRUTINY ASSESSMENT, MA DE THE FOLLOWING ADDITIONS:- I) AGRICULTURAL INCOME TREATED AS INCOME FROM BUSINESS : RS.2,61,66,179 II) DEEMED DIVIDEND U/S 2(22)(E) OF IT ACT : RS.2,02,74 ,602 III) DISALLOWANCE OF ADVERTISEMENT CHARGES : RS. 2,3 6,775 TOTAL : RS.4,66,77,556 THE ENTIRE AGRICULTURAL INCOME CLAIMED BY THE ASSESS EE AS EXEMPT U/S 10(1) OF THE I T ACT WAS BROUGHT TO TAX AS BUSI NESS INCOME. THE AO ALSO ADDED BACK RS.2,02,74,802/- AS DEEMED D IVIDEND U/S 2(22)(E) OF THE ACT AND DISALLOWED RS.2,36,775/- PA ID FOR ADVERTISEMENT CHARGES. 2.1 AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE FIRST APPEL LATE AUTHORITY. 2.2 WITH REGARD TO THE ISSUE OF CLAIM OF AGRICULTU RAL INCOME TREATED AS INCOME FROM BUSINESS, THE CIT(A), FOLLOWING THE PAGE 3 OF 14 ITA NOS.802 & 864/BANG/2010 3 ORDER OF THE TRIBUNAL IN ASSESSEES SISTER CONCERN S CASE IN ITA NO.3102/BANG/2004 DATED 14/7/2006 FOR THE ASST. YEAR 2001-02 (M/S NAMDHARI SEEDS PVT. LTD., URGAHALLI ROAD, BIDA DI P.O.), HELD THAT 10% OF THE GROSS RECEIPT IS TO BE TREATED AS B USINESS INCOME AND THE BALANCE 90% AS AGRICULTURAL INCOME. THE IS SUE OF DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT WAS DECIDED IN FAV OUR OF THE ASSESSEE. THE DISALLOWANCE OF ADVERTISEMENT CHARGE S WAS NOT PRESSED BEFORE THE FIRST APPELLATE AUTHORITY AND HEN CE, THIS GROUND OF APPEAL BEFORE THE CIT(A) WAS DISMISSED. 2.3 AGGRIEVED BY THE DIRECTION OF THE CIT(A) TO TR EAT 10% OF THE AGRICULTURAL INCOME AS BUSINESS INCOME, THE ASSESSEE IS IN APPEAL BEFORE US. 2.4 THE LEARNED AR SUBMITTED THAT THE LEARNED CIT( A) SHOULD HAVE APPRECIATED THAT THE PROCESSING ACTIVIT Y UNDERTAKEN BY THE ASSESSEE ON THE SEEDS WAS A PROCESSING ORDINARY EMPLOYED BY THE CULTIVATOR TO MAKE THE SEEDS FIT TO BE TAKEN TO THE MARKET AND THE SAME WAS LIABLE TO BE TREATED AS AGRICULTURAL I NCOME. HE HAS ARGUED THAT THE PROCESS OF CONVERTING THE HYBRID SEE DS BY CLARIFICATION AND TREATMENT WITH THIRAM WAS A PROCE SS ORDINARY EMPLOYED AND A STATUTORY REQUIREMENT TO MAKE THE SEED S FIT TO BE TAKEN TO THE MARKET AND HENCE, LIABLE TO BE TREATED AS AGRICULTURAL INCOME. HE FURTHER SUBMITTED THAT THE LEARNED CI T(A) OUGHT NOT TO HAVE DIRECTED THE AO TO QUANTIFY THE NET PROFIT A T 10% FROM THE PROCESSING ACTIVITY AND TREAT IT AS BUSINESS INCOME. HOWEVER, HE PAGE 4 OF 14 ITA NOS.802 & 864/BANG/2010 4 FAIRLY SUBMITTED THAT THE ISSUE IN QUESTION IS SQUAR ELY COVERED BY THE ORDER OF THE TRIBUNAL IN THE CASE OF ASSESSEES SISTER CONCERN, CITED SUPRA, WHEREIN IT WAS CATEGORICALLY HELD THAT 10% OF THE GROSS AGRICULTURAL INCOME CLAIMED AS EXEMPTION IS TO BE T REATED AS BUSINESS INCOME. 2.5 ON THE OTHER HAND, THE LEARNED DR SUPPORTED TH E ORDER OF THE AO. 2.6 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. THE TRIBUNAL IN THE CASE OF (M/S NAMDHARI SEEDS PVT. LTD., URGAHALLI ROAD, BIDADI P.O.) IN IT A NO.3102/BANG/2006 HAS HELD THAT 10% OF THE NET PROF IT WILL HAVE TO BE TREATED AS NON AGRICULTURAL INCOME. THE RELE VANT FINDING OF THE TRIBUNAL AT PAGE 34 OF THE ORDER READS AS FOLLO WS:- HOWEVER, LOOKING TO THE EXPENSES DEBITED RELATING TO SUCH ACTIVITY, IT IS HELD THAT 10% OF NET PROFIT SHOWN IN NAMDHARI SEEDS WILL BE TREATED AS NON- AGRICULTURAL INCOME. SUCH NET PROFIT IS THE PROFIT AFTER EXCLUDING THE PROFIT FROM TRADING ACTIVITY OR IF THERE IS A LOSS IN TRADING ACTIVITY, THEN THE SAM E IS TO BE ADDED TO NET PROFIT SHOWN IN PROFIT AND LOSS ACCOUNT. SIMILARLY, IN THE CASE OF INDO AMERICAN EXPORT, 10% OF INCOME SHOWN FROM AGRICULTURAL ACTIVITIES WILL BE TREATED AS INCOME FROM BUSINESS ARISING FROM THE BUSINESS OF CONVERTING HYBRID SEEDS INTO CERTIFIED SEEDS. THE AO WILL RE-COMPUTE THE INCOME AFTER ALLOWING OPPORTUNITY TO THE ASSESSEE TO CLAIM THE DEDUCTION UNDER CHAPTER VIA, PROVIDED THE CONDITIONS FOR CLAIMING SUCH DEDUCTION ARE SATISFIED. THIS PAGE 5 OF 14 ITA NOS.802 & 864/BANG/2010 5 OPPORTUNITY IS NEEDED AS THE ASSESSEE HAS CLAIMED SUCH INCOME AS AGRICULTURAL INCOME AND THEREFORE, HAD NO OPPORTUNITY TO CLAIM THE DEDUCTIONS. 2.7 THE FACTS OF THIS CASE ARE IDENTICAL TO THE CA SE CONSIDERED BY THE TRIBUNAL CITED SUPRA. NO CONTRA D ECISION HAS BEEN BROUGHT TO OUR NOTICE. HENCE, RESPECTFULLY FOL LOWING THE COORDINATE BENCH DECISION OF THE TRIBUNAL IN ASSESS EES SISTER CONCERNS CASE, WE DISMISS THE APPEAL OF THE ASSESS EE. 2.8 IN THE RESULT, THE APPEAL FILED BY THE ASSESSE E IS DISMISSED. ITA NO.864/BANG/2010 (REVENUES APPEAL) 3. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS:- 1) THE LEARNED CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.2,02,74,802/- MADE BY THE AO U/S 2(22)(E) OF THE I T ACT, 1961. 2) THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT ADVANCE RECEIVED BY THE ASSESSEE FIRM FROM THE COMPANY IS NOT ASSESSABLE IN THE HANDS OF THE FIRM BUT IN THE HANDS OF THE PARTNER SHAREHOLDER. 3) THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE AO TO TREAT 10% OF AGRICULTURAL INCOME AS BUSINESS INCOME AND 90% AS AGRICULTURAL INCOME FOLLOWING THE DECISION OF ITAT, BANGALORE BENCH AGAINST WHICH APPEAL HAS BEEN FILED BY THE DEPARTMENT BEFORE THE HONBLE HIGH COURT. 3.1 AS REGARDS THE ISSUE RELATING TO GROUND NO.3 M ENTIONED ABOVE, THE NARRATION OF FACTS AND OUR FINDINGS IN A SSESSEES APPEAL PAGE 6 OF 14 ITA NOS.802 & 864/BANG/2010 6 (ITA NO.802/BANG/2010) HOLDS GOOD FOR THIS APPEAL A LSO. AS STATED IN ASSESSEES APPEAL (ITA NO.802/10), THE IT AT IN ITA NO.3102/2004 IN THE CASE OF M/S NAMDHARI SEEDS PVT. LTD. (ASSESSEES OWN GROUP COMPANY CASE), IT WAS DECIDED THAT 90% OF THE TOTAL INCOME OF THE ASSESSEE HAS TO BE CONSIDER ED AS AGRICULTURAL INCOME TO BE EXEMPT U/S 10(1) OF THE A CT. THEREFORE, WE HOLD THAT 90% OF THE TOTAL INCOME OF THE ASSESSE E HAS TO BE CONSIDERED AS AGRICULTURAL INCOME NOT FORMING PART OF THE TOTAL INCOME BY VIRTUE OF SECTION 10(1) OF THE ACT. IT IS ORDERED ACCORDINGLY. THEREFORE, GROUND NO.3 RAISED IN REVEN UES APPEAL IS DISMISSED. 3.2 THE BRIEF FACTS IN RELATION TO GROUND NOS.1 AN D 2 MENTIONED ABOVE ARE AS FOLLOWS:- THE ASSESSEE FIRM IS HAVING FIVE SUBSIDIARY CONCER NS, NAMELY, NAMDHARI FRESH, NAMDHARI SEEDS, NAMDHARI SEE DS (BANGALORE) NAMDHARI SEEDS (BIDADI), NAMDHARI SEEDS (RBNR), OUT OF WHICH, TWO WERE HAVING DEBIT BALANCES DURING THE YEAR I.E. NAMDHARI SEEDS AND NAMDHARI FRESH. DURING THE COU RSE OF ASSESSMENT PROCEEDINGS, A DETAILED VERIFICATION INT O THE ACCOUNTS OF THE ASSESSEE WAS MADE BY THE AO AND THE ASSESSEE WAS DIRECTED TO PRODUCE THE LEDGER EXTRACTS OF THE ASSESSEE FIRM IN THE BOOKS OF ACCOUNTS OF NAMDHARI SEEDS PVT. LTD. (NSPL) WHEREIN THE PARTNER SHRI UDAY SINGH IS ALSO DIRECTOR HOLDING MORE THAN 6 4% OF THE SHAREHOLDING IN NSPL. IT WAS NOTICED THAT A NET AM OUNT OF PAGE 7 OF 14 ITA NOS.802 & 864/BANG/2010 7 RS.2,02,74,802/- WAS ADVANCED BY NSPL TO ASSESSEE FI RM (A SUM OF RS.1,27,66,728/- TO NAMDHARI FRESH + RS.75,08,074 T O NAMDHARI SEEDS). THE AO SHOW CAUSED THE ASSESSEE AS TO WHY T HESE AMOUNTS RECEIVED FROM THE ASSOCIATED COMPANY (NSPL) SHOULD N OT BE TREATED AS DEEMED DIVIDEND TO THE EXTENT OF RESERVE S OF THE ASSOCIATED CONCERN IN THE HANDS OF THE RECIPIENT I. E. THE ASSESSEE FIRM. IN RESPONSE TO THE SHOW CAUSE NOTICE ISSUED, THE ASSESSEE EXPLAINED THAT THE ASSESSEE CONCERN AND TH E COMPANY IS HAVING COMMERCIAL TRANSACTIONS AND THEY ARE NOT SUND RY LOANS OR ADVANCES TO ATTRACT SEC.2(22)(E) OF THE ACT. FURTH ER IT WAS CONTENDED THAT THESE ALL TRANSACTIONS ARE IN THE RO UTINE COURSE OF BUSINESS. VARIOUS OBJECTIONS RAISED BY THE ASSESSEE WAS REJECTED BY THE AO FOR HIS DETAILED REASONING CONTAI NED IN PAGES 7 AND 8 OF THE ASSESSMENT ORDER AND BROUGHT TO TAX A SUM OF RS.2,02,74,802/- AS DEEMED DIVIDEND U/S 2(22)(E) OF THE I T ACT, 1961 IN THE HANDS OF THE ASSESSEE FIRM. 3.3 AGGRIEVED BY THE ASSESSMENT IN MAKING THE ADDIT ION U/S 2(22)(E) OF THE ACT, THE ASSESSEE CARRIED THE M ATTER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 3.4 IT WAS SUBMITTED BEFORE THE FIRST APPELLATE AU THORITY THAT WHATEVER MONEY THAT WAS PAID BY NSPL TO THE ASSE SSEE FIRM PAGE 8 OF 14 ITA NOS.802 & 864/BANG/2010 8 WAS ONLY TOWARDS THE SALE OF LAND AND AT NO POINT OF TIME, IT COULD BE CONSTRUED AS A LOAN OR ADVANCE FALLING WITHIN THE P URVIEW OF SECTION 2(22)(E) OF THE ACT. THE CIT(A), FOR HIS REASONS M ENTIONED IN PARA 5.2 OF HIS ORDER, HELD THAT THERE IS NO FINDING THA T THE ASSESSEE FIRM IS A SHAREHOLDER OF THE COMPANY NSPL, WHO IS TH E PAYER. HE HELD THAT SECTION 2(22)(E) ELABORATES CIRCUMSTANCES WHEREIN THE DEEMED DIVIDEND HAS TO BE TREATED AS INCOME OF THE SUBSTANTIAL SHAREHOLDER. SINCE THE ASSESSEE FIRM IS NOT A SHARE HOLDER AT ALL, THEREFORE, THE ADDITION IN THE HANDS AS DEEMED DIVI DEND WAS FOUND NOT JUSTIFIED. IN TAKING THE ABOVE VIEW, HE FOLLO WED THE JUDGEMENT OF THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT V HOTEL HILLTOP 313 ITR 116. 3.5 THE REVENUE, BEING AGGRIEVED, IS IN APPEAL BEF ORE US. 3.6 THE LEARNED DR SUBMITTED THAT THERE IS NO EXAM INATION OF THE ISSUE AS TO WHETHER THE ASSESSEE FIRM IS A S HAREHOLDER OF THE COMPANY NSPL, WHO HAS PAID THESE AMOUNTS. HE FA IRLY SUBMITTED THAT THE ISSUE IN QUESTION IS COVERED BY T HE JUDGEMENT OF THE HONBLE RAJASTHAN HIGH COURT CITED SUPRA AS WEL L AS BY THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN TH E CASE OF ACIT V BHAUMIK COLOUR (P) LTD. (MUM.) 118 ITD 1. HE REQUE STED THAT THE MATTER MAY BE REMITTED BACK TO THE AO TO EXAMINE WHE THER THE ASSESSEE FIRM IS A SHAREHOLDER OF THE COMPANY NSPL. PAGE 9 OF 14 ITA NOS.802 & 864/BANG/2010 9 3.7 THE LEARNED AR, ON THE OTHER HAND, SUPPORTED T HE FINDINGS OF THE CIT(A). HE ALSO SUBMITTED THAT HIS CASE BEFORE THE FIRST APPELLATE AUTHORITY WAS THAT PROVISIONS OF SEC TION 2(22)(E) WILL NOT BE ATTRACTED ON FACTS AND CIRCUMSTANCES OF THE CASE SINCE MONEY PAID BY NSPL TO THE ASSESSEE FIRM WAS ONLY TOWAR DS THE SALE OF LAND AND AT NO POINT OF TIME, IT COULD BE CONSTR UED AS LOAN OR ADVANCE. IT WAS SUBMITTED THAT THE CONTENTION OF T HE ASSESSEE WAS NOT ADJUDICATED UPON, BUT THE MATTER WAS DECIDED BY THE FIRST APPELLATE AUTHORITY IN FAVOUR OF ASSESSEE BY HOLDING THAT THE ASSESSEE FIRM WAS NOT A SHAREHOLDER IN THE PAYER COM PANY, NAMELY, NSPL AND THEREFORE, DEEMED DIVIDEND COULD NOT BE AS SESSED IN THE HANDS OF ASSESSEE FIRM. 3.8 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. AS A RESULT OF THE AMENDMENT MADE IN SECTION 2(22)(E) BY THE FINANCE ACT, 1987, THE SCOPE OF THE PROVISIONS OF SECTION 2(22)(E) HAS BEEN WIDENED WITH EFFECT FROM 1 ST APRIL, 1988, FOR AND FROM ASSESSMENT YEAR 1988-89. UP TO ASST. YE AR 1987-88, SECTION 2(22)(E) HAS APPLICATION, ON FULFILLMENT OF ALL OTHER CONDITIONS, IN RELATION TO ANY PAYMENT, BY A CLOSELY-HE LD COMPANY, OF ANY SUM BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, W HO HAS A SUBSTANTIAL INTEREST (AS DEFINED IN SECTION 2(32)) IN THE COMPANY. FOR AND FROM ASST. YEAR 1988-89 THAT SECTION 2(22 )(E) SHALL HAVE APPLICATION, ON FULFILLMENT OF ALL OTHER CONDITIONS, IN PAGE 10 OF 14 ITA NOS.802 & 864/BANG/2010 10 RELATION TO ANY PAYMENT MADE AFTER 31.5.1987 BY A CLOS ELY-HELD COMPANY, OF ANY SUM BY WAY OF ADVANCE OR LOAN TO - A SHAREHOLDER, WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE O F DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN 10 PE R CENT OF THE VOTING POWER, OR - ANY CONCERN (AS DEFINED IN EXPLANATION 3(A) TO SECTION 2(22) IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (AS DEFINED IN EXPLANATION 3(B ) TO SECTION 2(22)). 3.9 THERE IS NO DOUBT THAT AMOUNTS ADVANCED TO TH E CONCERN/FIRM, IN WHICH THE MAJOR SHAREHOLDER OF THE PAYER COMPANY, IS A PARTNER OF THE FIRM COMES WITHIN THE R EALM OF DEEMED DIVIDEND U/S 2(22)(E) IN VIEW OF THE ABOVE SAID AM ENDED PROVISIONS. HOWEVER, THE FURTHER QUESTION IS IN WHOSE HANDS THE DEEMED DIVIDEND IS TO BE ASSESSED, WHETHER IT IS TO BE ASS ESSED IN THE HANDS OF CONCERN/FIRM OR IN THE HANDS OF THE SHAREH OLDER. THIS ISSUE WAS DIRECTLY DEALT WITH BY THE HONBLE RAJASTHA N HIGH COURT IN THE CASE OF CIT V HOTEL HILLTOP 313 ITR 116. THE H ONBLE RAJASTHAN HIGH COURT HELD THAT THE DEEMED DIVIDEND IS TO BE A SSESSED IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF TH E CONCERN/FIRM. THE RELEVANT FINDING OF THE HONBLE RAJASTHAN HIGH COURT READS AS FOLLOWS:- THE MORE IMPORTANT ASPECT, BEING THE REQUIREMENT OF SECTION 2(22)(E) IS THAT THE PAYMENT MAY BE MADE TO ANY CONCERN, IN WHICH SUCH PAGE 11 OF 14 ITA NOS.802 & 864/BANG/2010 11 SHAREHOLDER IS A MEMBER OR PARTNER AND IN WHICH HE HAS SUBSTANTIAL INTEREST OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER. THUS, THE SUBSTANCE OF THE REQUIREMENT IS THAT THE PAYMENT SHOULD BE MADE ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER, OBVIOUSLY, THE PROVISION IS INTENDED TO ATTRACT THE LIABILITY OF TA X ON THE PERSON, ON WHOSE BEHALF OR FOR WHOSE INDIVIDUAL BENEFIT THE AMOUNT IS PAID BY THE COMPANY WHETHER TO THE SHAREHOLDER OR TO THE CONCERNED FIRM. IN WHICH EVENT, IT WOULD FALL WITHIN THE EXPRESSION DEEMED DIVIDEND. OBVIOUSLY, INCOME FROM DIVIDEND IS TAXABLE AS INCOME FROM OTHER SOURCE UNDER SECTION 56 OF THE ACT AND IN THE VERY NATURE OF THINGS THE INCOME HAS TO BE OF THE PERSON EARNING THE INCOME. THE ASSESSEE IN THE PRESENT CASE IS NOT SHOWN TO BE ONE OF THE PERSONS BEING SHAREHOLDER. OF COURSE, THE TWO INDIVIDUALS BEING ROOP KUMAR AND DEVENDRA KUMAR ARE THE COMMON PERSONS HOLDING MORE THAN REQUISITE AMOUNT OF SHAREHOLDING AND HAVING REQUISITE INTEREST IN THE FIRM BUT THEN THEREBY THE DEEMED DIVIDEND WOULD NOT BE DEEMED DIVIDEND IN THE HANDS OF THE FIRM RATHER IT WOULD OBVIOUSLY DEEMED DIVIDEND IN THE HANDS OF THE INDIVIDUALS ON WHOSE BEHALF OR ON WHOSE INDIVIDUAL BENEFIT BEING SUCH SHAREHOLDER THE AMOUNT IS PAID BY THE COMPANY TO THE CONCERN. 3.10 THE HONBLE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V BHAUMIK COLOUR (P) LTD. (MUM.) 118 ITD 1 WAS CONSIDERING THE FOLLOWING QUESTION OF LAW:- 1. WHETHER DEEMED DIVIDEND U/S 2(22)(E) OF THE INCOME TAX ACT, 1961 CAN BE ASSESSED IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER OF THE LENDER? PAGE 12 OF 14 ITA NOS.802 & 864/BANG/2010 12 2. WHETHER THE WORDS SUCH SHAREHOLDER OCCURRING IN SECTION 2(22)(E) REFER TO A SHAREHOLDER WHO IS BOTH THE REGISTERED SHAREHOLDER AND THE BENEFICIAL SHAREHOLDER? 3.11 THE HONBLE SPECIAL BENCH, FOLLOWING THE JUD GEMENT OF THE HONBLE RAJASTHAN HIGH COURT CITED SUPRA, AT PA RA 35 HELD AS FOLLOWS:- THE DEEMING PROVISIONS AS IT APPLIES TO THE CASE O F LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST, IS BASED ON THE PRESUMPTION THAT THE LOAN OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OF ADVANCE, THE INTENTION OF THE LEGISLATURE IS THEREFORE TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF THE CONCERN. 3.12 FURTHER IT WAS OBSERVED BY THE SPECIAL BENCH A T PARA 40 AS FOLLOWS:- IN THE EVENT OF THE PAYMENT 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 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 INTEREST IN THE CONCERN. THE ABOVE PROVISIONS ALSO THEREFORE CONTEMPLATE DEEMED DIVIDEND BEING TAXED IN THE HANDS OF A SHAREHOLDER ONLY. FOR THE REASONS STATED ABOVE, WE ARE OF THE VIEW THAT THE LAW LAID DOWN IN THE CASE OF NIKKO TECHNOLOGIES LTD. (SUPRA) IS NOT CORRECT. WE THEREFORE HOLD THAT DEEMED DIVIDEND U/S 2(22)(E) OF THE I T ACT, 1961 PAGE 13 OF 14 ITA NOS.802 & 864/BANG/2010 13 CAN BE ASSESSED ONLY IN THE HANDS OF A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF ANY EITHER PERSON. 3.13 FINALLY IT WAS CONCLUDED BY THE TRIBUNAL BY ANSWERING THE FIRST QUESTION THAT THE DEEMED DIVIDE ND CAN BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO IS A SHAR EHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER. 3.14 IN THE LIGHT OF THE JUDGEMENT OF THE HONBLE RAJASTHAN HIGH COURT AND OF THE SPECIAL BENCH OF THE TRIBUNAL CITED SUPRA, WE HOLD THAT IN THE INSTANT CASE, THE FIRM IS TO BE AS SESSED FOR THE DEEMED DIVIDEND FOR THE AMOUNTS RECEIVED BY WAY OF LO AN OR ADVANCE ONLY IN THE EVENT IT IS FOUND TO BE THE SHAR EHOLDER OF THE PAYER COMPANY, NAMELY, NSPL. ON THE OTHER HAND, IF TH E FIRM IS NOT THE SHAREHOLDER, IT IS TO BE TAXED IN THE HANDS OF THE BENEFICIAL SHAREHOLDER, NAMELY SRI UDAY SINGH. SINCE THERE IS N O EXAMINATION OF THE FACT AS TO WHETHER THE ASSESSEE FIRM IS THE SHAREHOLDER OF THE PAYER COMPANY, THE MATTER NEEDS TO BE REMITTED BA CK TO THE FILE OF THE AO FOR CONSIDERING THIS ASPECT. MOREOV ER, THE ASSESSEES CONTENTION THAT IT IS A BUSINESS ADVANCE AND NOT IN THE NATURE OF LOAN OR ADVANCE COMING WITHIN THE PURVIEW OF SECTION 2(22)(E) OF THE ACT, HAS NOT BEEN ADJUDICATED UPON. THIS ASPECT IS ALSO TO BE EXAMINED WHEN THE MATTER IS CONSIDERED A FRESH. IN THE LIGHT OF THE ABOVE, THIS ISSUE IS RESTORED TO THE F ILE OF THE AO, WHO PAGE 14 OF 14 ITA NOS.802 & 864/BANG/2010 14 SHALL DISPOSE OF THE MATTER AS EXPEDITIOUSLY AS POSS IBLE, AFTER AFFORDING A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 3.15 IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED, AS INDICATED ABOVE, FOR STATISTICAL PURPOS ES. THE ORDER PRONOUNCED ON TUESDAY, THE 31 ST DAY OF MAY, 2011 AT BANGALORE. SD/- SD/- (N BARATHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL ME MBER COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT(A) C ONCERNED. 4. THE CIT CONCERNED. 5. THE DR 6. GUARD FILE. MSP/18.5/20/5. BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.