Dazzle Designer Tiles P Ltd., CHENNAI V. ITO, CHENNAI

ITA 818/CHNY/2013

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68695 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-09-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 03-09-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 29-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S SRIDHAR
• Keywords: Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NO. 818/MDS/2013 (ASSESSMENT YEAR : 2009-10) M/S DAZZLE DESIGNER TILES PVT. LTD., C/O SHRI S. SRIDHAR, ADVOCATE, NEW NO.14, OLD NO.82, FLAT NO.5, 1 ST AVENUE, INDIRA NAGAR, ADYAR, CHENNAI - 600 020. PAN : AABCD 5272 H (APPELLANT) V. THE INCOME TAX OFFICER, COMPANY WARD I(1), CHENNAI - 600 034. (RESPONDENT) APPELLANT BY : SHRI S. SRIDHAR, ADVOCATE RESPONDENT BY : SHRI GURU BASHYAM , JCIT DATE OF HEARING : 03.09.2013 DATE OF PRONOUNCEMENT : 06.09.2013 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE, IT ASSAILS AN ADDITION OF ` 25,51,652/- MADE UNDER SECTION 2(22)(E) OF INCOME-T AX ACT, 1961 (IN SHORT 'THE ACT'). I.T.A. NO. 818/MDS/13 2 2. FACTS APROPOS ARE THAT ASSESSEE, ENGAGED IN MANU FACTURING OF CEMENT CONCRETE TILES, HAD FILED ITS RETURN FOR IMP UGNED ASSESSMENT YEAR DECLARING AN INCOME OF ` 22,90,000/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTED BY THE ASSESSI NG OFFICER THAT ASSESSEE HAD TAKEN A LOAN OF ` 1,44,38,000/- FROM ONE M/S PUGAZH CHEMICAL PLANT & EQUIPMENTS (P) LTD., OF WHICH, ` 76,68,000/- WAS REPAID. ASSESSING OFFICER VERIFIED THE SHARE HOLDI NG PATTERN OF ASSESSEE-COMPANY AS WELL AS LENDER COMPANY. SHE FO UND THAT THERE WERE COMMON SHAREHOLDERS IN BOTH COMPANIES, WHO WER E HAVING SHARES IN EXCESS OF 10% OF BOTH THE COMPANIES. ONE SHRI M. PUGAZHENDHI AND ONE MS. S. TAMIL SELVI HELD 36.65% EACH OF THE EQUITY SHARES OF M/S PUGAZH CHEMICAL PLANT & EQUIPM ENTS (P) LTD. THE SAME SHRI M. PUGAZHENDHI AND MS. S. TAMIL SELVI HELD 42.5% AND 28.9% RESPECTIVELY, OF THE EQUITY SHARES OF THE ASSESSEE- COMPANY. THEREFORE, ACCORDING TO HER, RIGOURS OF S ECTION 2(22)(E) WAS ATTRACTED FOR THE LOAN TAKEN BY THE ASSESSEE FR OM M/S PUGAZH CHEMICAL PLANT & EQUIPMENTS (P) LTD. THE ASSESSING OFFICER FOUND THAT LENDER COMPANY, NAMELY M/S PUGAZH CHEMICAL PLA NT & EQUIPMENTS (P) LTD., WAS HAVING ACCUMULATED RESERVE S. SHE, THEREFORE, HELD THAT THE SUM OF ` 25,51,652/-, OUT OF THE NET OF THE I.T.A. NO. 818/MDS/13 3 AMOUNT RECEIVED AND REPAID, COULD BE CONSIDERED AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE. THE ASSESSM ENT WAS COMPLETED ACCORDINGLY. 3. IN ITS APPEAL BEFORE CIT(APPEALS), ARGUMENT OF T HE ASSESSEE WAS THAT ASSESSMENT OF DEEMED DIVIDEND COULD BE DON E ONLY IN THE HANDS OF REGISTERED SHAREHOLDERS. AS PER ASSESSEE, THE ADVANCE GIVEN BY M/S PUGAZH CHEMICAL PLANT & EQUIPMENTS (P) LTD. WAS FOR COMMERCIAL PURPOSES. FURTHER SUBMISSION OF THE ASS ESSEE WAS THAT ITS BUSINESS OF MANUFACTURING CEMENT CONCRETE TILES HAD BECOME COMPETITIVE AND IT BECAME NECESSARY FOR IT TO DIVER SIFY ITS BUSINESS BY IMPORTING GLAZED FLOORING TILES FROM OTHER COUNTRIE S. FOR THIS PURPOSE, DEALERSHIP WAS GIVEN TO M/S PUGAZH CHEMICAL PLANT & EQUIPMENTS (P) LTD. AND THE ADVANCE RECEIVED WAS NOTHING BUT A DEALERSHIP DEPOSIT. RELIANCE WAS PLACED ON THE DECISION OF SP ECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT VS. BHAUMIK COLOU R PVT. LTD. (2009 118 ITD 1) AND THAT OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. ANKITECH PVT. LTD. & OTHERS (340 ITR 14). 4. HOWEVER, THE CIT(APPEALS) WAS NOT IMPRESSED. AC CORDING TO HIM, ASSESSEE COULD NOT SHOW THAT THE AMOUNT RECEIV ED FROM LENDER COMPANY WAS ONLY A TRADE ADVANCE. THERE WAS NO EVI DENCE TO SHOW I.T.A. NO. 818/MDS/13 4 THAT NATURE OF TRANSACTIONS BETWEEN ASSESSEE AND LE NDER COMPANY WERE IN THE NORMAL COURSE OF BUSINESS. IN THIS VIE W OF THE MATTER, HE CONFIRMED THE ADDITION. 5. NOW BEFORE US, ADV. SHRI S. SRIDHAR, APPEARING F OR THE ASSESSEE, STRONGLY ASSAILING THE ORDERS OF AUTHORIT IES BELOW, SUBMITTED THAT LOWER AUTHORITIES DID NOT CONSIDER T HE SPECIAL BENCH DECISION IN THE CASE OF BHAUMIK COLOUR PVT. LTD. (S UPRA), WHERE IT WAS CLEARLY HELD THAT DEEMED DIVIDEND COULD BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO WAS THE SHAREHOLDER OF THE LE NDER COMPANY AND NOT IN THE HANDS OF A BORROWING CONCERN. AS PE R LEARNED A.R., INTENTION BEHIND THE PROVISION OF SECTION 2(22)(E) WAS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDER. THE ASSESSEE HERE ADM ITTEDLY WAS NOT A SHAREHOLDER OF THE LENDER COMPANY. NONE OF ITS SHA REHOLDERS HAD RECEIVED ANY BENEFIT FROM THE TRANSACTION OF LOAN/ DEPOSIT RECEIVED FROM THE LENDER COMPANY. ACCORDING TO HIM, THE VIE W TAKEN BY THE SPECIAL BENCH IN THE CASE OF BHAUMIK COLOUR PVT. LT D. (SUPRA) WAS AFFIRMED BY HON'BLE DELHI HIGH COURT IN THE CASE OF ANKITECH PRIVATE LIMITED & OTHERS (SUPRA) AS WELL AS LATER IN THE DE CISION OF CIT VS. GOPAL CLOTHING CO. (P) LTD. (350 ITR 67). IN ANY C ASE, ACCORDING TO HIM, THE TRANSACTIONS WERE IN THE COURSE OF COMMERC IAL OPERATIONS OF I.T.A. NO. 818/MDS/13 5 THE ASSESSEE-COMPANY FOR EXPANSION OF ITS BUSINESS. ASSESSEE HAD APPOINTED M/S PUGAZH CHEMICAL PLANT & EQUIPMENTS (P ) LTD. AS A DEALER FOR ITS NEW GLAZED FLOOR TILE BUSINESS AND T HE AMOUNT GIVEN BY THE LENDER COMPANY WAS ONLY A DEPOSIT FOR SUCH DEAL ERSHIP. 6. PER CONTRA, SHRI GURU BASHYAM, APPEARING FOR THE REVENUE, STRONGLY SUPPORTING THE ORDERS OF AUTHORITIES BELOW , SUBMITTED THAT HON'BLE BOMBAY HIGH COURT IN THE CASE OF SADANA TEX TILES MILLS (P.) LTD. V. CIT (188 ITR 318) HAD CLEARLY HELD THAT SEC TION 2(22)(E) COULD BE APPLIED EVEN ON A CORPORATE ENTITY FOR ADVANCE O F LOAN RECEIVED BY SUCH CORPORATE ENTITY, IF THE CREDITOR WAS HAVING A CCUMULATED PROFITS, AS REQUIRED UNDER SECTION 2(22)(E) OF THE ACT. FUR THER, ACCORDING TO HIM, MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF N IKKO TECHNOLOGIES (I) (P) LTD. (I.T.A. NO. 4077/MUM/2002 ) DATED 30 TH DECEMBER, 2005 HAD HELD THAT WHERE COMMON SHAREHOLD ERS WERE THERE, A LOAN TAKEN BY A CONCERN COULD BE BROUGHT W ITHIN THE AMBIT OF SECTION 2(22)(E) OF THE ACT. 7. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. NO DOUBT, LD. CIT(APPEALS) WAS JUSTIFIED IN COMING TO A FINDING THAT ASSESSEE COULD NOT SHOW THE COMMERCIAL NATURE OF TH E TRANSACTIONS ENTERED BY IT WITH THE LENDER COMPANY, M/S PUGAZH C HEMICAL PLANT & I.T.A. NO. 818/MDS/13 6 EQUIPMENTS (P) LTD.. EXCEPT FOR A LETTER DATED 19 TH NOVEMBER, 2012 FILED BEFORE THE CIT(APPEALS), THERE IS NOTHING TO SUBSTANTIATE THE CONTENTION OF THE ASSESSEE THAT THE AMOUNT GIVEN BY M/S PUGAZH CHEMICAL PLANT & EQUIPMENTS (P) LTD. WAS A DEPOSIT FOR DEALERSHIP. THIS LETTER AT THE BEST WAS ONLY A SELF-EFFECTUATIN G DOCUMENT. THERE IS NOTHING ON RECORD TO SHOW THAT ASSESSEE HAD DIVERSI FIED ITS BUSINESS INTO IMPORTED GLAZED TILES NOR ANYTHING TO SHOW THA T IT HAD APPOINTED M/S PUGAZH CHEMICAL PLANT & EQUIPMENTS (P) LTD. AS A DEALER. ASSESSEE HAS ALSO NOT BROUGHT ON RECORD AS TO WHETH ER ANY SIMILAR DEPOSITS WERE RECEIVED FROM OTHER DEALERS FOR SAME PURPOSE. THE AMOUNT RECEIVED BY THE ASSESSEE WAS ` 1,44,38,000/- FROM M/S PUGAZH CHEMICAL PLANT & EQUIPMENTS (P) LTD., OUT OF WHICH, ` 76,68,000/- WAS REPAID. HAD IT BEEN DEPOSIT OF TRA DING NATURE, AS REITERATED BY THE ASSESSEE, THERE WOULD NOT HAVE BE EN ANY REPAYMENT. BUT, AT THE SAME TIME, IT IS AN ADMITTE D POSITION THAT ASSESSEE-COMPANY AS SUCH WAS NOT A SHAREHOLDER OF T HE LENDER COMPANY. MAY BE THERE WERE INDIVIDUAL SHAREHOLDERS , WHO HAD SHARES OF BOTH THE COMPANIES, HOLDING IN EXCESS OF 10% IN SUCH COMPANIES. HOWEVER, TO ROPE IN A LOAN/ADVANCE AS D EEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT, IT IS NECESSARY THAT THE BENEFIT SHOULD HAVE BEEN RECEIVED BY THE SHAREHOLDERS. THE SPECIAL BENCH I.T.A. NO. 818/MDS/13 7 OF THIS TRIBUNAL IN THE CASE OF BHAUMIK COLOUR PVT. LTD. (SUPRA) HAS CLEARLY HELD AT PARAS 39 AND 40 OF ITS ORDER THAT D EEMED DIVIDEND COULD BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO WAS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HA NDS OF A PERSON OTHER THAN A SHAREHOLDER. IT WAS HELD BY THE TRIBU NAL AT PARAS 39 AND 40 OF ITS ORDER AS UNDER:- 39. IN THE DECISION OF THE TRIBUNAL IN THE CASE OF NIKKO TECHNOLOGIES (I) (P) LTD. (SUPRA), RELIANCE HAS BEE N PLACED ON CIRCULAR NO.495 DATED 22 ND SEPTEMBER, 1987 WHICH STATES AS FOLLOWS:- FURTHER DEEMED DIVIDEND WOULD BE TAXABLE IN THE H ANDS OF THE CONCERN, WHERE ALL THE FOLLOWING CONDITIONS ARE SAT ISFIED.. WE ARE OF THE VIEW THAT CIRCULARS OF CBDT TO THE E XTENT THAT THEY DO NOT TONE DOWN THE RIGOR OF THE PROVISIONS O F THE ACT IN THE SENSE TO THE EXTENT THEY ARE NOT BENEVOLENT ARE NOT BINDING. 40. APART FROM THE ABOVE, IT IS ALSO NOTICED THAT S . 2(22)(E)(III) PROVIDES TO A SHAREHOLDER AS FOLLOWS: DIVIDEND DOES NOT INCLUDE: (I) TO (II). (III) ANY DIVIDEND PAID BY A COMPANY WHICH IS SET OFF BY THE COMPANY AGAINST THE WHOLE OR ANY PART OF ANY SUM PR EVIOUSLY PAID BY IT AND TREATED AS A DIVIDEND WITHIN THE MEANING OF SUB-CL. (E) TO THE EXTENT TO WHICH IT IS SO SET OFF. 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 ALLOW ED TO THE I.T.A. NO. 818/MDS/13 8 CONCERN, BECAUSE THE CONCERN CAN NEVER RECEIVE DIVI DEND 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 HAND S OF A SHAREHOLDER ONLY. FOR THE REASONS STATED ABOVE, WE ARE OF THE VIEW THAT THE LAW LAID DOWN IN THE CASE OF NIKKO TE CHNOLOGIES (I) (P) LTD. (SUPRA) IS NOT CORRECT. WE THEREFORE HOLD THAT DEEMED DIVIDEND UNDER S. 2(22)(E) OF THE I.T. ACT, 1961 CA N BE ASSESSED ONLY IN THE HANDS OF A SHAREHOLDER OF THE LENDER CO MPANY AND NOT IN THE HANDS OF ANY OTHER PERSON. THE VIEW TAKEN BY THE SPECIAL BENCH HAS BEEN CONFIR MED BY HON'BLE DELHI HIGH COURT IN THE CASE OF ANKITECH PRIVATE LI MITED & OTHERS (SUPRA) AS WELL AS IN THE CASE OF GOPAL CLOTHING CO . (P) LTD. (SUPRA). NO DOUBT, IN THE CASE OF SADHANA TEXTILES MILLS (P. ) LTD. (SUPRA), RELIED ON BY THE LEARNED D.R., HON'BLE BOMBAY HIGH COURT HAD HELD THAT SECTION 2(22)(E) COULD BE APPLIED EVEN ON AN A DVANCE OR LOAN PAID TO A CORPORATE ENTITY. HOWEVER, IN THE SAID C ASE, THE ASSESSEE- COMPANY ITSELF WAS HOLDING EQUITY SHARES IN THE LEN DER COMPANY, EXCEEDING 10%. HERE, ON THE OTHER HAND, ADMITTEDLY THE ASSESSEE- COMPANY WAS NOT HOLDING ANY SHARES IN THE LENDER CO MPANY AT ALL. THEREFORE, IN OUR OPINION, THE SAID DECISION WILL N OT HELP THE CASE OF THE REVENUE. 8. COMING TO THE DECISION OF NIKKO TECHNOLOGIES (I) (P) LTD. (SUPRA) OF THE TRIBUNAL, AGAIN RELIED ON BY THE LEA RNED D.R., THE SAID I.T.A. NO. 818/MDS/13 9 DECISION STOOD OVERRULED BY THE SPECIAL BENCH DECIS ION IN THE CASE OF BHAUMIK COLOUR PVT. LTD. (SUPRA). IN VIEW OF THIS LEGAL POSITION, WE ARE OF THE OPINION THAT THE LOAN RECEIVED BY THE AS SESSEE-COMPANY FROM M/S PUGAZH CHEMICAL PLANT & EQUIPMENTS (P) LTD . COULD NOT BE CONSIDERED AS DEEMED DIVIDEND IN THE HANDS OF THE A SSESSEE- COMPANY DEPOSIT IT BEING NOT A TRADING ADVANCE. TH E ADDITION THEREFORE STANDS DELETED. 9. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS A LLOWED. ORDER WAS PRONOUNCED IN THE COURT ON FRIDAY, THE 6 TH OF SEPTEMBER, 2013, AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 6 TH SEPTEMBER, 2013. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-IX, CHENNAI-34 (4) CIT-I, CHENNAI-34 (5) D.R. (6) GUARD FILE