THE PRINCIPAL COMMISSIONER OF INCOME TAX , VADODARA 1 V. M/S KRISHNA COIL CUTTERS PVT. LTD.

TAXAP/517/2022

AI Insights

The case involves three tax appeals by the Principal Commissioner of Income Tax, Vadodara 1, against M/s. Krishna Coil Cutters Pvt. Ltd., concerning the treatment of unsecured loans as deemed dividends under section 2(22)(e) of the Income Tax Act, 1961. The appeals were based on the common order of the Income Tax Appellate Tribunal, which had earlier reversed the additions made by the Assessing Officer. The Tribunal found that the loans were advanced in the ordinary course of business and that the lender company was substantially engaged in money lending activities, thus not falling under the purview of deemed dividends as per the cited section.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 728230 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 10-10-2022
• Assessment Year: misc
• Other Referred Cases: Pr. CIT v Mohan Bhagwatprasad Agrawal, CIT Vs. Parle Plastics Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: NIKUNT RAVAL
• Keywords: Assessment Year; Deemed dividend; Income tax appellate tribunal; Scrutiny; Unsecured loan
• Section: 142(1); 143(2); 2(22)(e); 260A

Judgement Text

"C/TAXAP/516/2022 ORDER DATED: 10/10/2022 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 516 of 2022 With R/TAX APPEAL NO. 517 of 2022 With R/TAX APPEAL NO. 519 of 2022 ========================================================== THE PRINCIPAL COMMISSIONER OF INCOME TAX , VADODARA 1 Versus M/S. KRISHNA COIL CUTTERS PVT. LTD ========================================================== Appearance: MR NIKUNT K RAVAL(5558) for the Appellant(s) No. 1 for the Opponent(s) No. 1 ========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 10/10/2022 COMMON ORAL ORDER (PER : HONOURABLE MR. JUSTICE N.V.ANJARIA) All the three appeals filed under section 260A of the Income Tax Act, 1961, are cognate. They arise out of common order dated 6.7.2021 of the Income Tax Appellate Tribunal. 1.1 Since the facts are similar and issues are identical and the order is common, all the appeals were taken up together for hearing to be treated for disposal by this common order. 2. The first captioned Tax Appeal No. 516 of 2022 arises out of common order in so far as it related to Income Tax Appeal No. 545 of 2016 in respect of Assessment Year 2012-2013. The second Tax Appeal No. 517 of 2022 arises out of common order in so far as it related to Income Tax Appeal No. 2491 of 2017 pertaining to Assessment Year 2013-2014. The third Tax Appeal No. 519 of 2022 concerns with Page 1 of 9 C/TAXAP/516/2022 ORDER DATED: 10/10/2022 Income Tax Appeal No 1492 of 2014 in respect of Assessment Year 2011-2012. The Tribunal took Income Tax Appeal No. 1492 of 2014 as a lead case. 2.1 The issue is about justification in law or otherwise of addition in respect of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). 3. Taking facts from record of Tax Appeal No. 519 of 2022, the common respondent assessee- M/s. Krishna Coil Cutters Pvt. Ltd. filed its return on income on 9.9.2011 declaring total income of Rs. 81,20,620/-. The return was processed under section 143(2) of the Act. The case was selected for scrutiny. Notice under section 143(2) of the Act was issued on 10.09.2012. Thereafter, notice under section 142(1) of the Act was issued on 18.12.2012 for furnishing specific details. On behalf of the assessee, the details were furnished. 3.1 The assessee company was engaged in the business of manufacturing and trading of HR/CR sheets and trading of M.S.Plates. It was stated by the Assessing Officer in the assessment order that during the year under consideration, the balancesheet of the assessee company showed unsecured loan from one Krishna Sheet Processors Pvt.Ltd. to the extent of Rs. 19,65,00,000/-. It was stated on verification of share holding pattern of said Krishna Sheet Processors Pvt.Ltd., that the assessee was holding 21.45% of shares in the said company, which was more than 10% of the total share holding of the said company. It was the say of the Assessing Officer that the said Krishna Sheet Processors Pvt.Ltd. was not a company in which the public was substantially interested. The Assessing Officer. Therefore. stated that the loan Page 2 of 9 C/TAXAP/516/2022 ORDER DATED: 10/10/2022 received to the above extent from Krishna Sheet Processors Pvt.Ltd. by the assessee company was required to be treated as deemed dividend within the meaning of section 2(22)(e) of the Act. Show cause notice was issued to the assessee company to show cause as to why the said amount of Rs. 19,65,00,000/- should not be treated as deemed dividend. Reply was filed on 25.3.2013 making written submissions. 3.2 For the reasons recorded in the assessment order, the Assessing Officer included the above amount of Rs. 19,65,00,000/- as deemed dividend as above in the income of the assessee. The assessee preferred appeal before the Commissioner of Income Tax (Appeals) which took the view against the assessing officer. In another words, the appellate Commissioner reversed the additions made under section 2 (22)(e) of the Act. 3.3 The aggrieved department preferred appeal before the Income Tax Appellate Tribunal. A common order culminated in respect of assessment year 2011-12, 2-12-13 and 2013-14. The captioned three appeals accordingly arise therefrom. The First Appeal No. 519 of 2022 is relatable to the order of the Income Tax Appellate Tribunal in relation to Assessment year 2011-2012. Taken from the first captioned appeal in relation to the Assessment Year 2011-2012, he following questions are proposed claiming to be arising as substantial questions of law, (a) Whether in the facts and circumstances of the case, learned ITAT has erred in law and on facts in not upholding the addition of Rs.19,65,00,000/- made by the Assessing Officer u/s. 2(22)(e) of the Income Tax Act in respect of unsecured loan received by the assessee from group concern M/s. Krishna sheet processors Pvt.Ltd.? Page 3 of 9 C/TAXAP/516/2022 ORDER DATED: 10/10/2022 (b) Whether in the facts and circumstances of the case, learned ITAT has erred in law and on facts inholding that the loans and advances given to the assessee-company was for business purposes and that the lender company was substantially engaged in money lending activities, even though the assessee-company had failed to controvert the findings of the Assessing Officer and failed to substantiate its claims? (c) Whether in the facts and circumstances of the case, learned ITAT has erred in law and on facts in upholding the decision of CIT(A) deleting the addition of Rs.19,65,00,000/- made by the Assessing Officer u/s. 2(22)(e) of the Act after holding that it cannot be treated as deemed dividend u/s 2(22)(e) of the Income-tax Act, 1961, though the percentage of turnover of money lending is only 0.5% of total turnover of the assessee-company and funds deployed by the lender in loans and advances is only 46.28% which is less than 50% of the total funds available and, hence, the money lending activity of Krishna Sheet Processor Pvt. Ltd. (KSPPL) cannot be termed as substantial part of its business activity and accordingly the loans and advances received by the assessee from the sister concern is not covered in the exception provided in sec. 2(22)(e) of the Income-tax Act, 1961? (d) Whether on the facts and circumstance of the case, the finding of the learned ITAT that money lending constitutes 'substantial business' of the lending company is erroneous, illegal and perverse in view of the fact that the lender company has not obtained requisite permission to carry on money lending business ?” 3.4 In Appeal No. 516 of 2022 relatable to Assessment year 2012-2013 almost identical questions of law arises except the addition made by the Assessing Officer was of Rs. 14,30,10,000/- and further that in question No.(C), the percentage of turnover of money lending was 0.66%. In the same way, in the third Tax Appeal related to Assessment Year 2013-14, the amount of addition involved was Rs. 6,40,00,000/- and the percentage of turn over of money lending was 0.55%, but for these changes the questions proposed were the same. Page 4 of 9 C/TAXAP/516/2022 ORDER DATED: 10/10/2022 4. Section 2(22) of the Act defines the ‘dividend’. Section 2(22)(e) reads as under, “ \"dividend\" includes- (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; but \"dividend\" does not include- (i) a distribution made in accordance with sub- clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets; (ia) a distribution made in accordance with sub- clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalized profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, (and before the 1st day of April, 1965: (ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off: (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956); Page 5 of 9 C/TAXAP/516/2022 ORDER DATED: 10/10/2022 (v) any distribution of pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company). Explanation 1.-The expression \"accumulated profits\", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956. Explanation 2-The expression \"accumulated profits\" in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub- clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place. Explanation 3. For the purposes of this clause,- -\"concern\" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company; -a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern\" 5. While confirming the order of the Commissioner of Income Tax Appeal (Appeals), the Tribunal held that it was not possible to conclude from any stand point that any addition could be made by way of deemed dividend in case of assessee. It was observed that the assessee held 21.45% equity share capital of Krishna Sheet Processors Pvt.Ltd. which was a lender company. The lender company also held 40.83% equity share capital of the assessee. Both the companies thus had cross share Page 6 of 9 C/TAXAP/516/2022 ORDER DATED: 10/10/2022 holdings. Both the companies were engaged in the similar line of business of manufacturing HR/CR sheets and trading of M.S.Plates, stated the Tribunal. Those two companies had been functioning for mutual benefit. 5.1 The Tribunal further observing about the case of the assessee that the lender company had been advancing funds to the assessee even when the assessee was not a share holder. The funds were being advanced to the assessee by the said company right from Assessment Year 2009-2010 and the assessee had received the funds to the extent of Rs. 4.6 crores in the Assessment Year 2009-10. Similarly Rs. 10.90 crores were received in Assessment Year 2010-2011 and Rs. 9.65 crores in Assessment Year under consideration, that is Assessment Year 2011-2012. The assessee had acquired significant share holding in the lender company during the year under consideration. Thus the case of the assessee was found believable that the transactions of borrowing were in the ordinary course of business and that it was outside the purview of section 2(22)(e) of the Act. The said interest income earned by the assessee in the money lending activity was offered by the assessee under the head business income. It was also observed that lender company had given funds to the assessee by way of Inter Corporate Deposits (ICDs) and the lending was done on the similar rate of interest on which the funds were advanced to unrelated party. 5.2 The Tribunal rightly held in such factual background in favour of the assessee that section 2(22)(e) of the Act was not applicable. The Tribunal further finally hold that the addition was not justified, Page 7 of 9 C/TAXAP/516/2022 ORDER DATED: 10/10/2022 “We also simultaneously find merit in the other line of argument advanced on behalf of the assessee. It is case of the assessee that money lent to the assessee was received in the ordinary course of business for fulfillment of business supply through consolidated negotiation. It is also demonstrated by the assessee that similar advance was obtained in the earlier years right from AY 2010-11 where assessee was not a shareholder in the lender company at all. It is also simultaneously the case of the assessee that the lender company was substantially engaged in money lending activity. Furthermore, the lender company has charged interest on the loans advanced to the assessee. In these facts, the case of the assessee is squarely covered by the decision of the Hon'ble Gujarat High Court in Pr. CIT v Mohan Bhagwatprasad Agrawal [2020] 115 taxmann.com 69 (Gujarat) & CIT Vs. Parle Plastics Ltd. (2011) 332 ITR 63 (Bombay). Section 2(22)e) of the Act requires money so lent to be only 'substantial part of business and in contrast to the 'principal business' as wrongly assumed by the AO.” 5.3 In Principal Commissioner of Income Tax v/s. Mohan Bhagwatprasad Agrawal [(2020) 115 taxmann.com 69 (Gujarat)], the facts were that the assessee had been holding 10% shares in two companies in which the public was not substantially interested. The assessee obtained loan in form of advance from the said companies on interest payable at market interest. The Assessing Officer noticed that the main object of both the companies was to carry out business of building and general construction. The Tribunal came to the conclusion that the loan advances taken by the assessee was not covered by the provisions of section 292209e) of the Act. 5.4 This court held that where the assessee was holding mere 10% share in two companies and he obtained loan and advances from the said companies on interest and the Assessing Officer treated the amount of loan or advances to be deemed dividend to add the same in the income of the assessee, he was not justified in law. Both the companies were engaged in the money lending business. The view taken by the Assessing Page 8 of 9 C/TAXAP/516/2022 ORDER DATED: 10/10/2022 Officer was not correct and the addition could not have been made by way of deemed dividend in the income of the assessee. 5.5 The facts of the case in Mohan Bhagwatprasad Agrawal (supra) are quite comparable with the facts of the case on hand and the decision rendered in Mohan Bhagwatprasad Agrawal (supra) squarely applies to the issue involved in the present case. The Income Tax Appellate Tribunal relied on Mohan Bhagwatprasad Agrawal (supra) as also on the decision of the Bombay High Court in CIT vs. Parle Plastics Ltd. [(2011) 332 ITR 63 (Bombay)]. 6. In view of the foregoing discussion and reasons, it could not be said that any question of law much less any substantial question of law as proposed arise for consideration. The view taken by the Tribunal is eminently just, proper and legal. No other question of law arises in the facts of the case. 7. All the three appeals are therefore liable to be dismissed. They are summarily dismissed. (N.V.ANJARIA, J) (BHARGAV D. KARIA, J) C.M. JOSHI Page 9 of 9 "