Income Tax Appellate Tribunal - Chandigarh
Arora Knit Fab. (P) Ltd., Ludhiana vs Assessee on 23 August, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL: CHANDIGARH
BENCH 'B'
BEFORE HON'BLE Ms SUSHMA CHOWLA, JM AND
HON'BLE SHR I MEHAR S INGH, AM
I.T.A. No. 514/Chandi/2011
AY 2007-07
A.C.I.T. C-1, Ludhiana V. M/s Arora Knit Fab (P) Ltd
HA-51, Phase - VI
Focal Point
Ludhiana
PAN: AACCA 9779 K
Cross objection No. 58/Chandi/2011
Arising out of I.T.A. No. 514/Chandi/2011
AY 2007-07
M/s Arora Knit Fab (P) Ltd V A.C.I.T, C-1, Ludhiana
HA-51, Phase - VI
Focal Point
Ludhiana
PAN: AACCA 9779 K
(Appellant (Respondent)
Appellant By : Shri S.K. Mittal
Respondent By: Shri Prem Nath Arora
Date of hearing: 23.8.2011
Date of pronouncement: 24 .8.2011
ORDER
Per Mehar Singh, AM
The present appeal of the Revenue for the Assessment Year 2007-08 and the Cross objection filed by the assessee are directed against the order of ld. C IT(A)-I, Ludhiana dated 11.2.2011 passed u/s 250(6) of the Income-tax Act, 1961 (hereinafter referred to in short as "the Act". The revenue has raised seven grounds of appeal but in sum and substance the 2 ITA No. 514 & CO 58/Chandi/2011 AC IT v . A r o r a Kn i t F a b same revolve around single core issue of deletion by the ld. CIT(A) u/s 2(22)(e) of the Act.
ITA No. 514/Chandi/2011 - AY 2007-08 - Revenue's appeal
2. The brief and undisputed facts, as culled out from the record revealed that the assessee had filed return of income, for the Assessment Year 2007-08, on 15.11.2007, showing income at Rs. 29,65,142/-. The return was processed u/s 143(1) of the Act at an income of Rs. 29,65,142. The case was selected for scrutiny and assessment was framed u/s 143(3) of the Act at Rs. 1,57,87,650/-.
3. In the course of assessment proceedings, the AO invoked provisions of sec 2(22)(e) of the Act and made an addition of Rs. 1,12,44,952/-, on the foundation of observation that the assessee had resorted to colourable device with a view to evading tax. The AO placed reliance, on the decision of Mcdowell Co Ltd (1985) 154 ITR 148, CIT V. Sri Meenakshi Mills Ltd. 63 ITR 609 and C IT v. Durga Prasad More, 82 ITR 540, to support his finding pertaining to the device resorted to by the assessee, for the purpose of tax-evasion. The AO, has also recorded the factual- finding pertaining, to share holding pattern in the assessment order. It would be pertinent to reproduce the said finding with a view to appreciating the same.
"There is no doubt about the fact that in the case of the assessee the basic conditions as specified in sec 2(22)(e) are being fulfilled as the share holding profile of M/s Arora Fabrics Pvt Ltd (sister concern) white has given the advance/loan is as follows:
Ms. Harjit Kaur 63.54%
3
ITA No. 514 & CO 58/Chandi/2011
AC IT v . A r o r a Kn i t F a b
Mr. Mohinder Singh Arora 7.74%
Mr. Ravinder Pal Singh Arora 7.88%
Ms. Neena Arora 9.32%
The shareholding profile of the assessee i.e. M/s Arora Knit Fab Pvt Ltd is as follows:
Mr. Ravinder Singh Arora 8.78%
Mr. Mohinder Singh Arora 8.83%
Ms. Harjit Kaur 9.26%
Ms. Neena Arora 58.84%
85.71%
M/s Arora Fabrics Pvt Ltd is a company largel y owned by four share holders i.e. Mr. Ravinder Singh Arora, Mr. Mohinder Singh Arora, Ms. Harjit Kaur and Ms. Neena Arora, the famil y as a whole and Ms. Neena Arora has substantial share holding in the company.
These four persons have a combined share holding of 85.71% and Ms. Harjit Kaur has 58.84% shareholding in M/s Arora Knit Fab Pvt Ltd. which is substantial and decisive in decision making of the company. The loan from M/s Arora Fabrics Pvt Ltd to the assessee is, therefore, a loan to a concern in which the share holders have substantial interest. In this case the combined substantial share holding of 85.71% actually satisfies the condition that M/s Arora Fabrics Pvt Ltd. Has diverted its accumulated profits to you since the above mentioned four share holders have a substantial share holding in the recipient assessee company. Therefore it is the same setup of share holders who have the requisite voting power and substantial share holding in both the entities."4
ITA No. 514 & CO 58/Chandi/2011 AC IT v . A r o r a Kn i t F a b
4. The ld. C IT(A), after due appreciation of the submissions filed by the assessee and the case laws cited therein, deleted the impugned additions. The finding of the ld. CIT(A) as contained in para 4 onward of impugned appellate order are reproduced hereunder for the sake of proper appreciation:
"4 I have considered the facts of the case and submissions of the assessee. Assessee is a private limited company engaged in the business of manufacturing and processing of knitted fabrics. During the year assessee has received various amounts in its current account as loan and advance from M/s Arora Fabrics Pvt Ltd (AFP L) as noted by the AO on page 6 of the assessment order. On seeing the share holding pattern of the assessee company and M/s AFPL the AO has observed that M/s AFPL is owned by four share holders namel y, Mr. Ravinder Singh Arora, Mr. Mohinder Singh Arora, Ms. Harjit Kaur and Ms. Neena Arora, the famil y as a whole and Ms. Neena Arora had substantial share holding in the company. These four persons had a combined share holding of 85.71% and Ms. Harjit Kaur has 58.84% share holding in assessee company which is substantial and decisive in decision making of the company. M/s AFPL had reserve and surplus of Rs. 1,12,44,452/- as on 31.3.2006 and Rs. 1,12,02,870/- as on 31.3.2007. In view of the above, the AO was of the opinion that loan from M/s AFPL to the assessee is a loan to a concern in which the share holders have substantial interest and therefore after giving an opportunit y to the assessee treated the same as dividend u/s 2(22)(e) of the Act. However, addition was restricted to an amount of Rs. 1,12,44,452/- being the amount of reserve and surplus of M/s AFP L as on 31.3.2006 as against loans and advances of Rs. 4,43,00,000/-. Assessee, however, has objected to the above addition in eh written submissions reproduced above primaril y on the following grounds:
(i) That onl y the share holders can be assessed on account of deemed dividend and not the company u/s 2(22)(e) of the Act. 5
ITA No. 514 & CO 58/Chandi/2011 AC IT v . A r o r a Kn i t F a b
(ii) The business transactions are not covered u/s 2(22)(e) of the Act.
(iii) There can not be any clubbing of the individual, HUF, Minor and wife for the purpose of Sec 2(22)(e) of the Act. 4.1 As far as assessee's contention regarding that onl y share holders can be assessed on account of deemed dividend and not the company is concerned, same find support from various judgments as noted in the written submissions reproduced above and given below:
1 CIT v. Universal Medicare P. Ltd (2010 190 Taxman 144 (Bom) 2 SB decision in the case of M/s Bhaumik Colours Pvt Ltd (2009) 313 ITR (AT) 146,(Mum) (SB) 3 Decision of Hon'ble Rajathan High Court in the case of C IT V. Hotel Hill top (2009) 313 ITR 116 (Raj) 4.2 Therefore on this ground addition of Rs. 1,12,44,452/- cannot be made on account of deemed dividend u/s 2(22)(e). As far as assessee's contention that commission and business transactions are not covered u/s 2(22)(e) is concerned, same is not applicable to the assessee's case. As noted in the assessment order, assessee has maintained three separate accounts with M/s AFPL, i.e. job work account, sales account and advances/loans account. The loans account as noted on page 6 of the assessment order, is in respect of purel y advances received by the assessee company and therefore cannot be termed as business transaction. This contention of the assessee is therefore, rejected.
4.3 As regards assessee's contention that there cannot be anyh clubbing of different share holders such as individual, HUF, Minor and wife, same in my opinion is justified. In this case, the AO has reached the conclusion that provisions of section 2(22)(e) are applicable on the ground that the famil y as a whole and Ms. Meena Arora have substantial share holding in the assessee company and Ms. Harjit Kaur has 58.84% (actuall y it is 9.26%) in the assessee 6 ITA No. 514 & CO 58/Chandi/2011 AC IT v . A r o r a Kn i t F a b company. As noted in the written submissions, none of the share holder who is the beneficial owner of share holding not less than 10% of the voting power in the assessee company holdsl substantial interest in M/s AFPL. Ms. Neena Arora is holding 58.84% in the assessee company but she is holding onl y 9.32% shares in M/s AFPL which is below 10%. Her share holding in AFPL and is also holding 9.26% share holding in assessee company which is below 20% which is necessary to decide the holding of substantial interest in a company to whom the loans and advances have been given. It is thus, seen that conditions laid down in section 2(22)(e) with regard to minimum share holding by the share holders in assessee company vis-à-vis AFPL is not fulfilled. Share holding of various different persons cannot be clubbed to decide the issue of fulfillment of condition laid down in section 2(22)(e) of the Act. This view is supported by various judgments as relied upon by the assessee in his written submissions.
4.4 In view of the above discussion, I am of the opinion that while assessee cannot get relief on the ground that loans and advances are business transactions but the amount of loans and advances cannot be taxed as deemed dividend u/s 2(22)(e) of the Act for the reason that onl y the share holders can be assessed on account of deemed dividend and not the assessee company as the assessee company is not a share holder in AFPL and also on the ground that none of the share holders who is holding more than 10% shares in M/s AFP L is having substantial interest in the assessee company to whom the loans and advances have been given by M/s AFPL.
4.5 In view of the above discussion, addition of Rs. 1,12,44,452/- is deleted."
5. In the course of present proceedings, the Ld. 'DR' brought under sharp focus, the dubious nature of the transactions, resorted to by the assessee, with the sole object of indulging in tax-evasion. He also referred to, page 6 of the impugned assessment order and drew our attention, to the share holding pattern of the assessee. He supported the 7 ITA No. 514 & CO 58/Chandi/2011 AC IT v . A r o r a Kn i t F a b findings of the AO on the basis of case-laws cited in the assessment order, in respect of colourable device resorted to by the assessee.
6. Ld. 'AR' for the assessee submitted paper book and cited many decisions therein but placed reliance on the following cases and, further, vehementl y contended that the core issue is squarel y covered by the following decisions:
1 CIT v. Universal Medicare P Ltd (2010) 190 Taxman 144 (Bom) 2 SB decision in the case of Bhaumik Colours Pvt Ltd (2009) 313 ITR (AT) 146 Mumbai (SB) 3 CIT V. Hotel Hilltop (2009) 313 ITR 116 (Raj)
7 We have carefull y perused the facts of the case, rival submissions and relevant paper book filed by the assessee. A bare perusal of the facts reveals that the issue is covered by the above decisions relied upon by the assessee. The ld. CIT(A), in para 4 of the impugned appellate order, as reproduced above has also considered the same decisions. 7.1 The head note of the decision of the SB in the case of ACIT v. Bhaumik Colours Pvt Ltd (supra) are reproduced hereunder:
"To attract the first limb of the provisions of section 2(22)(e), the payment must be to a person who is a registered holder of shares. The word "shareholder" alone existed in the definition of dividend in the 1922 Act and has been interpreted under the 1922 Act to mean a registered shareholder. This expression "shareholder" found in the 1961 Act has to be therefore construed as appl ying onl y to registered shareholders. It is a principle of interpretation of statutes that once certain words in an Act have received a judicial construction in one of the superior courts, and the Legislature has repeated them in a subsequent statute, the Legislature must be taken 8 ITA No. 514 & CO 58/Chandi/2011 AC IT v . A r o r a Kn i t F a b to have used them according to the meaning which a court of competent of jurisdiction has given them."
7.2 In C IT v. Hotel Hilltop, 217 CTR (Raj) 527, Hon'ble Rajathan High Court held as under:
"The important aspect, being the requirement of Sec 2(22)(e) is that the payment may be made to any concern in which such shareholder is a member, or the 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. , obviousl y the provision is intended to attract the liability of tax on the person, on whose behalf or for whole individual benefit the amount is paid by the company whether to the shareholder or to ....concerned firm. In which event, it would fall within the expression "deemed dividend".
Obviousl y income from dividend is taxable as income from other sources under Sec 56 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 "R" and "D" are the common persons, holding more than requisite amount of shareholding and are 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 obviousl y be deemed dividend in the hands of the individuals, on whose behalf or on whose individual benefit, being such shareholder, the amount is paid b y the company to the concern. Thus the significant requirement of Sec 2(22)(e) is not shown to exist. The liabilit y of tax, as deemed dividend, could be attract red in the hands of the individuals, being the shareholders and not in the hands of the firm." 7.3 The ld. CIT(A), has recorded a clear finding, in Para 4.3 of the appellate order that the conditions laid down in Sec 2(22)(e) with regard to minimum share holding by the share holders in assessee company vis- 9
ITA No. 514 & CO 58/Chandi/2011 AC IT v . A r o r a Kn i t F a b à-vis M/s AFPL are not fulfilled. It was, further, observed that share holders of various different persons cannot be clubbed to decide the issue of fulfillment of conditions laid down in Sec 2(22)(e) of the Act. He was of the opinion that the decisions relied upon by the assessee, support his findings.
8. In view of legal and factual discussions, including the case laws cited and relied upon by the assessee, we are of the considered view that there is no infirmity, in the findings of the ld. CIT(A), and hence, the same are upheld.
9. Appeal of the revenue is dismissed.
Cross objection No. 58/Chandi/2011 - AY 2007-08
10. In view of the findings recorded above, as also in the light of submission of the ld. 'AR' that the Cross objection intended to support the appellate order. The impugned cross objections is dismissed as infructuous.
11. In the result, appeal of the revenue and the Cross objections filed by the assessee are dismissed.
Order Pronounced on 24 .8.2011
Sd/- Sd/-
(SUSHMA CHOWLA) (MEHAR SINGH)
JUDICIAL MEMBER ACCOUNANT MEMBER
Chandigarh, the 24 .8.2011
SURESH
Copy to:
The Appellant/The Respondent/The C IT/The C IT(A)/The DR 10 ITA No. 514 & CO 58/Chandi/2011 AC IT v . A r o r a Kn i t F a b