DCIT RG 8(2) (OSD), MUMBAI V. POONA GALVANIZERS P. LTD, MUMBAI

ITA 8287/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9363 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 08-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: M K PATEL
• Keywords: Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C, MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. 8287/MUM/2011 (ASSESSMENT YEAR : 2007-08) DCIT RG 8(2) (OSD) ROOM NO. 209, AAYKAR BHAVAN, M.K. ROAD, MUMBAI 400 020 VS POONA GALVANIZERS P. LTD. 705, MORYA LANDMARK-II, OSHIWARA LINK ROAD, ANDHERI (W) MUMBAI 400053 PAN AADCP 2111 R (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RAJARSHI DWIVEDY RESPONDENT BY : SMT. M.K. PATEL DATE OF HEARING: 21.11.2012 DATE OF PRONOUNCEMENT: 21.11.2012 O R D E R PER VIVEK VARMA, JM: THE APPEAL HAS BEEN FILED BY THE DEPARTMENT AGAINST THE ORDER OF CIT(A) 17, MUMBAI, DATED 13.09.2011, WHERE THE SOLITARY ISSUE IS WITH REGARD TO THE DELETION OF ADDITION MADE AT RS. 1,07,33,270 UNDER SECTION 2(22) (E) OF THE INCOME TAX ACT. 2. THE FACTS AND THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE REVENUE AUTHORITIES HAVE BEEN EXHAUSTIVELY REPRODUCE IN THE IMPUGNED ORDER, WHICH ARE AS FOLLOWS (EXTRACTED PORTION). THE FACTS OF THE CASE ARE THAT DURING THE COURSE O F ASSESSMENT PROCEEDINGS, THE AO NOTED FROM THE NOTES TO ACCOUNTS AND FROM TH E TAX AUDIT REPORT, THAT THE ASSESSEE COMPANY HAD TAKEN A LOAN OF RS.1,22,80,000 /- FROM ITS SISTER ITA NO. 8287/MUM/2011 POONA GALVANIZERS P. LTD. 2 CONCERN, M/S KARAMTARA FASTNERS PVT. LTD. THE AO AL SO NOTED THAT THE ASSESSEE COMPANY AND M/S KARAMTARA FASTNERS PVT. LT D. WERE HAVING COMMON SHARE HOLDERS, ONE OF WHOM, NAMELY SHRI H.N. SINGH, WAS HAVING SUBSTANTIAL INTEREST IN BOTH THE COMPANIES. THE AO ALSO NOTED T HAT, FOR THE YEAR ENDING 31.03.2008, M/S KARAMTARA FASTNERS PVT. LTD. WAS HA VING ACCUMULATED PROFITS OF RS. 1,07,33,270/-. THE AO, THEREFORE, ASKED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE PROVISIONS OF SECTION 2(22)(E) WERE NOT ATTRACTED. THE ASSESSEE REPLIED THAT THE AMOUNT WAS RECEIVED FOR THE PURPOS ES OF BUSINESS. IN SPECIFIC, IT STATED THAT, IN TERMS OF MOU ENTERED INTO BETWEEN T HE GROUP COMPANIES, WHICH INCLUDED M/S KARAMTARA FASTNERS PVT. LTD., IT WAS A GREED THAT THE ASSESSEE COMPANY WOULD UNDERTAKE THE GALVANIZING PROCESS OF TOWERS AND FASTERS ON BEHALF OF M/S KARAMTARA FASTNERS PVT. LTD., AS PER TERMS AND CONDITIONS. HENCE, THE LOAN WAS RECEIVED FROM M/S KARAMTARA FAS TNERS PVT. LTD. AS PART OF THE MOU. THE AO, HOWEVER, DID NOT ACCEPT THE EXPLAN ATION ON THE GROUNDS THAT THE PURPOSE OF TAKING THE LOAN IS IMMATERIAL FOR AP PLICABILITY OF THE PROVISIONS OF SECTION 2(22)(E). THE AO ALSO HELD THAT THE MOU WAS NOT A GENERAL DOCUMENT AS THE SAME WAS NOT REGISTER AND WAS ENTERED INTO ONLY TO DEFEAT THE PROVISIONS OF SECTION 2(22)(E). THE AO, THEREFORE, INVOKED THE PROVISION OF SECTION 2(22)(E) AND ADDED BACK RS.1,07,33,270 TO THE INCOME OF THE ASSESSEE. 3. THE ASSESSEE, AS A CONSEQUENCE OF THESE FINDINGS B Y THE AO, APPROACHED THE CIT(A), BEFORE WHOM THE ASSESSEE REITERAT ED ITS SUBMISSIONS. THE CIT(A), TAKING INTO CONSIDERATION THE ARGUME NTS OF THE ASSESSEE, HELD (AS EXTRACTED), IN THE COURSE OF APPELLATE PROCEEDINGS, THE APPELL ANT HAS, APART FROM REITERATING THE SUBMISSIONS MADE BEFORE THE AO THAT THE LOAN WAS MADE IN THE REGULAR COURSE OF BUSINESS, ALSO RELIED UPON THE DE CISION OF THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. UNIVERSAL MEDICARE PVT . LTD.324 ITR 263 AND UPON THE DECISION OF THE MUMBAI SPECIAL BENCH, IN THE CA SE OF BHAUMIK COLOUR PVT. LTD. 313 ITR (AT) 146. THE ALTERNATE ARGUMENT OF TH E APPELLANT WAS THAT EVEN IF IT IS HELD THAT THE ADVANCE/LOAN ATTRACTED THE PROV ISIONS OF SECTION 2(22)(E), THE ADDITION HAS TO BE MADE IN THE HANDS OF THE REGISTE RS SHAREHOLDER, I.E. SH. H.M. SINGH AND NOT THE ASSESSEE COMPANY. THE CIT(A), THUS HELD THAT THE RECIPIENT WAS MR. H.M. SINGH & NOT THE ASSESSEE CO. 4. THE CIT(A) FURTHER NOTED, .THAT FOR SECTION 2(22)(E) TO APPLY THE AMOUNT O UGHT TO HAVE BEEN RECEIVED AS AN ADVANCE OR LOAN FROM A COMPANY TO A CONCERN I N WHICH THE SHAREHOLDER HAD SUBSTANTIAL INTEREST AND THAT CONDITION WAS NOT MET IN THE INSTANT CASE, SINCE THE AMOUNT IN QUESTION WAS NEITHER AN ADVANCE NOR A LOAN TO THE ASSESSEE, FOR THE PURPOSES OF TAXATION A DEEMED DIV IDEND WOULD BE TAXABLE IN THE HANDS OF THE SHAREHOLDER AND NOT IN HANDS OF TH E ASSESSEE TO WHOM THE PAYMENT WAS ADVANCED. THE ASSESSING OFFICER, HOWEVE R, CAME TO THE CONCLUSION THAT ALL THE CONDITIONS FOR THE APPLICAT ION OF SECTION 2(22)(E) WERE FULFILLED AND THE LOAN FROM CSPL WOULD HAVE TO BE TREATED AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE; THE HIGH COURT HELD : THE EFFECT OF SECTION 2(22) IS TO PROVIDE AN INCLUS IVE DEFINITION OF THE EXPRESSION DIVIDEND. SUB-CLAUSE (E) EXPANDS THE NATURE OF PA YMENT MADE BY THE COMPANY ITA NO. 8287/MUM/2011 POONA GALVANIZERS P. LTD. 3 IN WHICH THE PUBLIC IS NOT SUBSTANTIALLY INTERESTED BY WAY OF AN ADVANCE OR LOAN TO A SHAREHOLDER OR TO ANY CONCERN IN WHICH SUCH SH AREHOLDER IS A MEMBER OR PARTNER, SUBJECT TO THE FULFILLMENT OF THE REQUIREM ENT WHICH ARE SPELT OUT IN THE PROVISION. SIMILARLY, A PAYMENT MADE BY A COMPANY O N BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER IS TREAT ED BY SUB-CLAUSE (E) TO BE INCLUDED IN THE EXPRESSION DIVIDEND. CONSEQUENTLY , THE EFFECT OF SUB-CLAUSE (E) OF SECTION 2(22) IS TO BROADEN THE AMBIT OF THE EXP RESSION DIVIDEND BY INCLUDING CERTAIN PAYMENTS WHICH THE COMPANY HAS MA DE BY WAY OF LOAN OR ADVANCE OR PAYMENTS MADE ON BEHALF OF OR FOR THE IN DIVIDUAL BENEFIT OF A SHAREHOLDER. THE DEFINITION DOES NOT ALTER THE LEGA L POSITION THAT DIVIDEND HAS TO BE TAXED IN THE HANDS OF THE SHAREHOLDER. CONSEQUEN TLY, IN THE INSTANT CASE, THE PAYMENT, EVEN ASSUMING THAT IT WAS A DIVIDEND, WOUL D HAVE TO BE TAXED NOT IN THE HANDS OF THE ASSESSEE BUT IN THE HANDS OF THE S HAREHOLDER. SIMILAR IN THE CASE OF BHAUMIK COLOUR PVT. LTD. THE FACTS BEFORE THE MUMBAI SPECIAL BENCH WERE THAT THE ASSESSEE-COMPANY, NAMEL Y BCPL, TOOK AN INTEREST BEARING LOAN OF RS. 9 LAKHS FROM ANOTHER COMPANY UP PL. ON APPEAL, THE COMMISSIONER (APPEALS) DELETED THE ADDITION MADE BY THE ASSESSING OFFICER HOLDING THAT NNT WAS NOT BENEFICIAL SHAREHOLDER OF SHARES IN BCPL OR UPPL AND, THEREFORE, THE SECOND LIMB OF THE PROVISIONS O F SECTION 2(22)(E) COULD NOT BE VIS--VIS THE ASSESSEE. THE HIGH COURT HELD THAT : THE PROVISIONS OF SECTION 2(22)(E) WHICH BROUGHT IN A NEW CATEGORY OF PAYMENT WHICH WAS TO BE CONSIDERED AS DIVIDEND AS INTRODUCE D BY THE FINANCE ACT, 1987 WITH EFFECT FROM 1-4-1988, VIZ., PAYMENT BY A COMPANY TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR PARTNER AND I N WHICH HE HAS A SUBSTANTIAL INTEREST DO NOT SAY AS TO IN WHOSE HAN DS THE DIVIDEND HAS TO BE BROUGHT TO TAX, WHETHER IN THE HANDS OF THE CONCER N OR THE SHAREHOLDER. THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22 )(E) IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDER. THE DEEMING PROVISIONS AS IT APPLIES 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 TH AT THE LOAN OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLD ERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. THE INTENTION OF THE LEGISLATU RE IS, THEREFORE, TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDER AND N OT IN THE HANDS OF THE CONCERN. IT WAS OPINED THAT DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY A ND NOT IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER. FURTHER, THE EXPRE SSION SHAREHOLDER REFERRED TO IN SECTION 2(22)(E) REFERS TO BOTH A REGISTERED SHAREHOLDER AND BENEFICIAL SHAREHOLDER. IF A PERSON IS A RESISTED SHAREHOLDER BUT NOT THE BENEFICIAL SHAREHOLDER THEN THE PROVISIONS OF SECTION 2(22)(E) WOULD NOT APPLY. SIMILARLY, IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGI STERED SHAREHOLDER THEN ALSO THE PROVISIONS OF SECTION 2(22)(E) WOULD NOT APPLY. IN THE INSTANT CASE, THE BENEFICIAL SHAREHOLDER IS SHRI. H.M. SINGH, WHO IS HAVING SUBSTANTIAL INTEREST IN BOTH THE COMPANIES. THEREFORE, DEEMED DIVIDEND UNDER SECTION 2(22)(E) SHOULD HAVE BEEN BROUGHT TO TAX IN THE HANDS OF SHRI H.M. SINGH AND NOT IN THE HANDS OF THE ASSESSEE COM PANY. 5. THE CIT(A), THUS DELETED THE ADDITION MADE BY THE AO , HOLDING THAT THE PROVISIONS OF SECTION 2(22)(E) WERE NOT APPLICABLE ON THE ASSESSEE COMPANY. ITA NO. 8287/MUM/2011 POONA GALVANIZERS P. LTD. 4 6. AGGRIEVED, THE DEPARTMENT IS IN APPEAL BEFORE THE ITAT. 7. BEFORE US THE DR STRENUOUSLY ARGUED THE CASE OF THE AO, WHEREAS, THE AR, HEAVILY RELIED ON THE DECISION ARRIVED BY THE CIT(A). 8. WE HAVE PERUSED THE ORDERS OF THE REVENUE AUTHO RITIES AND WE FIND THAT THE CIT(A) HAS GIVEN VERY EXHAUSTIVE FINDINGS, WHICH HA VE BEEN EXTRACTED IN OUR ORDER. WE FIND THAT, EVEN AS PER THE C HART, PREPARED BY THE AO IN THE ASSESSMENT ORDER, SHOWING THE DETAILS OF T HE REGISTERED SHARE HOLDERS AND THE BENEFICIAL SHARE HOLDER IN BOTH THE COMPANIES, THE BENEFICIAL AND REGISTERED SHAREHOLDER WAS MR. H.M. SINGH, AND THE ASSESSEE COMPANYS NAME DOES NOT FEATURE ANYWHERE. T HE CHART, AS PREPARED BY THE AO AND REPRODUCED IN THE ASSESSMENT ORDER IS, SHAREHOLDING PATTERN OF POONA GALVANIZER PVT LTD SR. NO. NAME OF SHAREHOLDER NO. OF SHARES HELD % OF SHAREHOLDING 1. MR. TANVEER SINGH 2500 12.5 2. MR RAJIV SINGH 2500 12.5 3 MR. H.M. SINGH 5000 25 4 MR. PRASHANT HINGORANI 8500 42.5 5 MR. KUNAL BHATIA 1500 7.5 20000 100 SHAREHOLDING PATTERN OF KARAMTARA FASTENERS PVT LTD SR. NO. NAME OF SHAREHOLDER NO. OF SHARES HELD % OF SHAREHOLDING 1. M/S. KARAMTARA ENGINEERING PVT LTD 90000 18.00 2. MR. H.M. SINGH 402500 80.50 3 MRS. INDERJEET SINGH 2500 0.50 4 MR. TANVEER SINGH 2500 0.50 5 MR RAJIV SINGH 2500 0.50 500000 100 ITA NO. 8287/MUM/2011 POONA GALVANIZERS P. LTD. 5 9. IN THE LIGHT OF THESE CIRCUMSTANCES AND RESPECTFULLY FOLLO WING THE ABOVE DECISIONS, WE FIND NO REASON TO DISTURB THE DECISION OF THE CIT(A), DELETING THE ADDITION MADE BY THE AO U/S 2(22)(E) AT RS. 1,07,33,270. WE, THEREFORE, SUSTAIN THE ORDER OF THE CIT(A). 10. IN THE RESULT, THE APPEAL FILED BY THE DEPARTMENT IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 21/11/2012. SD/- ( RAJENDRA SINGH ) ACCOUTANT MEMBER SD/- ( VIVEK VARMA ) JUDICIAL MEMBER MUMBAI, DATE: 21/11/2012 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)- 22 , MUMBAI. 4) THE CIT 10, MUMBAI, 5) THE D.R. C BENCH, MUMBAI. 6) COPY TO GUARD FILE. BY ORDER ASSTT. REGISTRAR I.T.A.T., MUMBAI RASIKA