Madras High Court
Commissioner Of Income Tax vs M/S.Printwave Services P. Ltd on 10 November, 2014
Bench: R.Sudhakar, G.M.Akbar Ali
In the High Court of Judicature at Madras Dated: 10.11.2014 Coram The Honourable Mr.JUSTICE R.SUDHAKAR and The Honourable Mr.JUSTICE G.M.AKBAR ALI Tax Case (Appeal) No.747 of 2014 Commissioner of Income Tax Chennai. .... Appellant Vs. M/s.Printwave Services P. Ltd. No.7, Thiru.Vi.Ka.Industrial Estate, Guindy, Chennai - 600 032. .... Respondent APPEAL under Section 260A of the Income Tax Act, 1961 against the order dated 14.5.2010 in I.T.A.No.1636/Mds/2009 on the file of the Income Tax Appellate Tribunal, Madras 'C' Bench for the assessment year 2005-06. For Appellant : Mr.T.R.Senthil Kumar Standing counsel for Income Tax ------------ J U D G M E N T
(Delivered by R.SUDHAKAR,J.) This Tax Case (Appeal) is filed by the Revenue as against the order of the Income Tax Appellate Tribunal raising the following substantial questions of law:
1. Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that a sum of Rs.40 lakhs paid is not assessable in the hands of the assessee company as per provisions of Section 2(22)(e) of the Income Tax Act, 1961?
2. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that para 10.3 of circular No.495 dated 22.9.1987 issued by CBDT is not applicable?"
2. The assessment in this case relates to the assessment year 2005-06. The respondent/assessee, Printwave Services P. Ltd. received a sum of Rs. 41,46,588/- from another private limited company, namely, Front Line Printers P. Ltd., which is stated to be sister concern of the assessee company. On the date on which the above amount was received, the assessee paid a sum of Rs.42,96,677/- to one Shri.T.R.Jawahar, who is said to be the Director in both the companies and was having common interest in both the companies. On verification of the details furnished by the assessee, the Assessing Officer found that the said T.R.Jawahar was holding 10% of the shareholding in the assessee company, Printwave Services P. Limited and 43.9475% of shareholding in the assesse's sister concern Front Line Printers P. Ltd. In the books of accounts of the assessee company, the amount received from Front Line Printers P. Ltd. was shown as trade advance. It also came to the notice of the Assessing Officer that the amount so paid by the assessee to Mr.T.R.Jawahar was utilised by him for repayment of housing loan. Taking note of these facts, the Assessing Officer held as follows:
Hence, the use of nomencleature for the receipt of advance from Front Line Printers as 'Trade Advance' or 'Printing Advance cum General Advance' is to divert the attention of the Assessing Officer and nothing but the loan received from the company. Therefore, the provision u/s.2(22)(e) is attracted in this case.
On perusal of the Balance Sheet of M/s.Front Line, it is found that the General Reserve as on 31.3.2005 is Rs.1,10,00,000/-. Accordingly, the amount of Rs.40 lakhs is added u/s.2(22)(c) of the Income Tax Act, 1961.
3. Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals), who allowed the appeal holding as follows:
2. On a perusal of the details filed in the course of the assessment proceedings, the Assessing Officer noted that the assessee company have received a sum of Rs.41,56,588 from a sister concern Front Line Printers Private Limited. On the same date of receipt, an amount of Rs.42,96,677 was paid by the assessee company to Shri T.R.Jawahar. The Assessing Officer also noted that Shri T.R.Jawahar owned 10% of the shares of the assessee company and also 43.95% of the shares of Front Line Printers. Shri T.R.Jawahar was also a director in both these companies. Even though the amount received by the assessee company from Front Line Printers was shown as trade advance, the same had effectively been utilized by Shri T.R.Jawahar towards repayment of housing loan. On these facts, the Assessing Officer brought to tax an amount of Rs. 40 lakhs as deemed dividend received by the assessee company in terms of the provisions of Section 2(22)(e) of the Income-tax Act, 2961.
3. The deeming provisions contained in Section 2(22)(e) come into operation in the case of any payment by way of advance or loan to a share holder or to any concern in which such share holder has a substantial interest. Deemed receipt of dividend can only be in the hands of a substantial share holder. It is a fact that the assessee company itself is not a share holder in the company Front Line Printers. Accordingly, no dividend, normal or deemed, could have been received by the assessee company from Front Line Printers as long as the assessee company was not a share holder in that concern. The substantial share holder in the concern Front Line Printers was Shri T.R.Jawahar and deemed dividend, if any, would be assessable in his hands alone and not in the hands of the assessee company. The assessment of deemed dividend in the hands of the assessee company was accordingly not correct and the appeal filed on this ground bythe assessee company is hereby allowed.
4. The Income Tax Appellate Tribunal, before which the Revenue pursued the matter, came to the conclusion that in order to satisfy the requirement of Section 2(22)(e) of the Income Tax Act, the assessee should be the beneficial owner of the shares besides being a registered shareholder. Only if these two ingredients are satisfied, the question of assessment to tax as deemed dividend would arise. In this regard, the Tribunal relied upon the earlier decision of the Tribunal reported in 118 ITD 1 (ACIT V. Bhoumik Colour (P) Ltd.) The Tribunal, on a plain reading of Section 2(22)(e) of the Income Tax Act, came to the conclusion that the assessee not being a registered or beneficial owner of the shareholdings, is not liable to be taxed and hence the Tribunal placing reliance on the Explanatory Notes to Finance Act stating that it cannot override the provisions of the Act rejected the appeal filed by the Department.
5. Aggrieved by the order of the Income Tax Appellate Tribunal, the Revenue has filed the present appeal.
6. We have heard Mr.T.R.Senthilkumar, learned Standing Counsel appearing for the Revenue at length and perused the materials placed before this Court.
7. Before going into the merits of the case, it is relevant to extract the provision relating to dividend. Section 2(22)(e) of the Income Tax Act defines dividend, which reads as follows:
"2(22)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 (hereafter 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;
........
8. From a reading of the above provision, it is clear that Section 2(22)(e) defines dividend, which is a payment by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares 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 the present case, the assesee is not the beneficial or registered owner of the shareholdings in the company.
9. In the light of the above-said provision, the findings of the Commissioner of Income Tax (Appeals) as well as the Tribunal that the assessee, not being a registered or beneficial shareholder, is not liable to pay tax, are correct. We find no reason to interfere with the order of the Tribunal.
10. Accordingly, finding no merits, this Tax Case (Appeal) stands dismissed. No costs.
Index :Yes/No (R.S.,J) (G.M.A.,J) Internet:Yes/No 10.11.2014 sl To 1. The Income Tax Appellate Tribunal, Madras 'C' Bench. 2. The Commissioner of Income Tax (Appeals) -V, Chennai. 3. The Income Tax Officer (OSD), Company Circle V(2), Chennai. R.SUDHAKAR,J. AND G.M.AKBAR ALI,J. sl Tax Case (Appeal) No.747 of 2014 10.11.2014