Income Tax Appellate Tribunal - Mumbai
D. P. Vora Securities Pvt. Ltd., Mumbai vs Dcit - 4(1)(1), Mumbai on 24 April, 2017
आयकर अपीऱीय अधिकरण, मुंबई न्यायपीठ "डी", मुंबई IN THE INCOME TAX APPELLATE TRIBUNAL BENCH "D" MUMBAI BEFORE SHRI D.T.GARASIA, JM AND SHRI RAJESH KUMAR, AM I.T.A. No.5961/Mum/2016 (निर्धारण वर्ा / Assessment Year : 2013-14) D P Vora Securities Pvt Ltd., Dy. Commissioner of Income 21/22/B, 1st floor, Tax-4(1)(1), बनाम/ Khatau Building, Aayakar Bhavan, A D Mody Marg, Fort, Vs. M K Road, Mumbai-400023 Mumbai-400020.
स्थायी ऱेखा सं ./ PAN : AACCD1947L
(अपीऱाथी /Appellant) : (प्रत्यथी / Respondent)
अपीऱाथी की ओर से / Appellant by : Shri K Gopal and
Shri Jitendra Singh
प्रत्यथी की ओर से/ Assessee by : Shri Purushottam Kumar
सन
ु वाई की तारीख /Da te o f He a r in g : 24.4.2017
घोषणा की तारीख /Da te o f Pro n ou n ce me nt : 24.4.2017
आदे श / O R D E R
PER RAJESH KUMAR, A. M:
This is an appeal filed by the assessee against the order dated 23.8.2016 passed by the ld.CIT(A)-9, Mumbai for the assessment year 2013-14.
2. The only issue raised by the assessee in various grounds of appeal is against the confirmation of addition of Rs.4,15,05,865/- by the ld.CIT(A) as made by the AO by invoking the provisions of section 2(22)( e) of the Income Tax Act,1961 without appreciating the facts that the assessee is neither a 2 ITA No.5961/M/2016 beneficial shareholder in M/s Touchstone Capital Market Services Pvt Ltd from whom the funds were borrowed nor having any substantial interest in the same and also that the advances were received as short term trading advances to meet the working capital needs and was repaid during the assessment year itself.
3. Brief facts of the case are that the assessee filed its return of income on 19.9.2013 declaring total income of Rs.2,12,970/-, which was processed under section 143(1) of the Act. During the course of assessment proceedings, the AO noticed that the assessee has accepted a loan to the tune of Rs.5,60,00,000/- from M/s Touchstone Capital Market Services Pvt Ltd in which the Shri Deepak Vora was holding 630000 shares constituting 66.315% of the total holdings. Besides, Shri Deepak Vora was holding 100 shares in M/s Touchstone Capital Market Services Pvt Ltd which worked out to 0.01% of the total share capital of the said company, which was according to the assessee inadvertently taken as 50,500 shares which worked out to 38% of the total shareholdings. In other words, the AO observed that the Shri Deepak Vora was holding 50,500 shares in M/s Touchstone Capital Market Services Pvt Ltd and also 630000 shares in assessee company constituting 38% and 66.31% respectively. The AO issued show cause notice to the assessee to show cause as to why the loan accepted by the assessee should not be treated as deemed dividend under the provisions of section 2(22)(e) of the Act for the reasons that 3 ITA No.5961/M/2016 Shri Deepak Vora was having substantial interest in both the companies. The assessee replied the show cause notice by submitting before the AO that the assessee holding only 100 shares in M/s Touchstone Capital Market Services Pvt Ltd and was not holding 10% of the total holdings. The AO also observed that both the companies were operating from the same premises and have been aiding and helping to each other to meet their obligations to the Stock Exchanges as both the companies were having in the business of trading in shares and securities on BSE and NSE. The observations of the AO are reproduced below:
"6.6. On plain reading of section the deemed dividend will also be attracted to a company fulfilling the following conditions:
i) Any payment by a company not being a company in which the public are substantially interest. M/s. Touchstone Capital Market services Pvt.
Ltd. is not a public limited company in which public not substantially interested.
ii) Any sum by way of advances or loans. Mls Touchstone Capital Market services Pvt. Ltd. has given a loan of RS.5,60,00,000/- to the assessee company.
iii) Holding not less than ten per cent of the voting power. Shri Deepak Vora is having holding of 66.315% which is more than 10%.
iv) To any concern in which such shareholder is a member [(a) "concern" means a Hindu undivided family, or a firm or an association of persons or 3 body of individuals or a company]. Shri Deepak Vora is having shareholding of 38% is M/s. Touchstone Capital Market services Pvt. Ltd.
v) 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. In this 4 ITA No.5961/M/2016 case, it is seen from the balance sheet of M/s.Touchstone Capital Market services Pvt. Ltd. that there is an accumulated profit of Rs.4,15,05,865/-.
6.7 From the above, it is clear that the loan taken by the assessee company from M/s Touchstone Capital Market Services Pvt Ltd. has fulfilled all the conditions laid down as per the provisions of section 2(22)(e) of the Act."
Finally, the AO added the sum of Rs.4,15,05,865/- as deemed dividend income in terms of section 2(22)(e) of the Act by framing the assessment vide order dated 8.3.2016 passed under section 143(3) of the Act by assessing the total income of the assessee at Rs.4,19,80,950/- by making various disallowances interalia deemed income u/s 2(22)(e) of the Act of Rs.4,15,05,865/-. Aggrieved by the order of AO, the assessee preferred an appeal before the ld.CIT(A).
4. In the appellate proceedings, the ld. CIT(A) dismissed the appeal of the assessee after considering various submissions and contentions filed by the assessee which has been incorporated in para 6.3 of the appeal order by observing and holding as under :
"6.3 I have carefully considered the submission of the appellant and the order passed by the A.O. It has been noticed from the schedule 24b wherein the details of loan accepted have been given, and where it has been found that the appellant accepted a loan of Rs 5,60,00,000/- from M/s Touchstone Capital Market Services P Ltd. The AO has observed that from the shareholding pattern of the appellant company, Shri Deepak P. Vora was having 6,30,000 shares which is substantial share holding of 66.31 %. The AO has further observed that from the finances of Touchstone Capital Market Services PLtd, it is found that Shri Deepak Vora was having 50,500 shares with substantial share holding of 38%. Thus, it is clear that the appellant Shri Deepak P Vora has received certain amount from Touchstone Capital Market Services P Ltd. During the appellate proceeding the appellant has failed to refute this factual 5 ITA No.5961/M/2016 observation of the AO .Undisputedly, Shri Deepak Popatlal Vora is also the Director in the present appellant company i.e. D.P. Vora Securities Pvt Ltd and in this capacity he has got substantial control over both the companies which can be observed from the pattern of shareholdings. The AO has further observed that from the balance sheet of M/s Touchstone Capital Market Services Pvt Ltd there was an accumulated profit to an extent of Rs.4,15,05,865/ -. Thus, although the transaction of amount in the garb of loan received by the appellant company from Touchstone Capital Market Services Pvt Ltd amounting to Rs 5,60,00,000/ - is hit by Section 2(22)(e) of the IT. Act, 1916. But because the accumulated profit itself of M/ s Touchstone Capital Market Services Pvt Ltd was only to the extent of Rs 4,15,05,865/- only, the AO action of the AO is found to be judicious and justified by adding Rs.4,15,05,865/- only and not the full amount of Rs.5,60,00,000/ -.
In this regard reference is made to the decision of jurisdictional High Court of Bombay in the case Star Chemicals P Ltd vs CIT, 72 Taxman 279 (Bombay), where it has been held as under :
"The Explanation to section 2(22)(e) which explains the expression 'accumulated profits' in section 2(22), did not support the third contention of the assessee. Explanation 1 to section 2(22) clearly provides what is excluded from the ambit of this expression. It only excludes capital gains arising over a certain period of time. The position is further clarified by Explanation 2 which says that 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. Further, the Supreme Court in the case of P.K. Badiani v. CIT [1976] 105 ITR 642 has held that the term 'profits' appearing in section 2(6A)(e) of the Indian Income-tax Act, 1922 which corresponds to section 2(22)(e) of the 1961 Act means profits in the commercial sense, i.e., profits made by the company in the usual and true sense of the term. It has also held that development rebate reserves created out of the company's profits constitute a part of the accumulated profits of the company. Hence, the development rebate reserves created by the subsidiary company formed a part of the accumulated profits for purposes of section 2(22)(e), and, therefore, the appropriations made to the development rebate reserve account in the accounts of the subsidiary company up to 31-3-1970 were accumulated profits of the said company for the purpose of determining the amount of dividend under section 2(22)(e) in the hands of the assessee. Thus, in view of the aforesaid, the sum of Rs. 2,83,346 was 6 ITA No.5961/M/2016 includible in the assessment of the assessee for 1971-72 under section 2(22)(e).
Further, under section 8(a) for the purposes of inclusion in the total income of an assessee any dividend declared by a company or distributed or paid by it within the meaning of sub-clause (a) or sub-clause (b) or sub- clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2 shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be. Therefore, what was to be taken into account was the payment received by the company during the relevant previous year. Therefore, the accumulated profits of the subsidiary company up to the end of the assessment year 1970-71 had to be ignored for determining the amount taxable as dividend in the hands of the assessee for the assessment year 1971-72 under section 2(22)(e) because what one had to take into account for the purposes of section 2(22)(e) for inclusion as dividend income of the assessee was the amount received by the assessee as a loan of the kind set out in section 2(22)(e) in the assessment year 1971-72.
Aggrieved by the order of ld.CIT(A) filed an appeal before this Tribunal.
5. Before us the ld.AR vehemently argued before us that the FAA has grossly erred in upholding the order of AO by confirming the addition of Rs.4,15,05,865/- under section 2(22)(e) of the Act whereas by ignoring the facts of the case that the necessary conditions for invoking the provisions of section 2(22)(e) of the Act were not satisfied and therefore the order of the ld.CIT(A) suffered from serious legal and factual infirmities. The ld. AR brought to our notice the shareholding positions which is reproduced below:
Company Shareholder
Mr.Deepak P TCMSPL DPVSPL
Vora
Touchstone Capital (TCMSPL) 38.10% 0.01%
D P Vora Securities "DPVSPL"- the assessee 66.32% 0.01%
company and appellant in this case
7
ITA No.5961/M/2016
The ld. AR submitted before us that both the companies were carrying out
business in different stock exchanges i.e. Bombay Stock Exchange and National Stock Exchange. The ld. AR submitted that the assessee and the TCMSPL were having mutal arrangements for taking and giving money in order to meet their trading requirements and commitments in stock exchanges. The ld. AR further submitted that money so received from TCMSPL were used for the assessee for making payments to the stock exchange and not for the Director Shri Deepak Vora and therefore money received was in the ordinary course of business which was a trading advance and was not covered by the provisions of section 2(22)(e) of the Act. The ld. AR further submitted that the addition can only be made in the hands of registered shareholder and not the assessee who is not a registered shareholder of the company. In defence of his argument, the ld. AR relied on the following decisions :
i) CIT V/s Creative Dyeing and Printing P Ltd(2009) 318 ITR 476 (Del);
ii) CIT V/s Gopal Clothing Co.P.Ltd (2013) 350 ITR 67 (Delhi);
iii) CIT V/s Impact Containers P Ltd (2014) 367 ITR 346 (Bom).
The ld. AR finally submitted that in view of the decision of Hon'ble Jurisdictional High Court and other High Courts the issue was now squarely covered in favour of the assessee and against the revenue and therefore the addition as confirmed by the FAA should deleted.
8ITA No.5961/M/2016
6. On the other hand, the ld.DR submitted that the facts of the case and relied on the orders of authorities below.
7. We have heard the rival contentions and perused the material placed before us including the orders of authorities below and case laws cited before us. We find from the para 6.8 of the assessment order, wherein it has been clearly admitted by the AO that the issue is covered in favour of the assessee by the decision of hon'ble jurisdictional High Court which is extracted below:
"6.8 As far as judicial precedents are concerned, this issue was decided by the Hon'ble Bombay High Court in the case of CIT-10 V/s M/s Universal Medicare Pvt.Ltd No.2264 of 2009 dated 22, March 2010 in favour of the assessee and held that the deemed dividend will be attracted in the hands of the shareholder who is having substantial interest in both the companies. However, the department has not accepted the decision and filed SLP before the Apex Court"
According to the AO the addition has been made in order to keep the issue alive as the department has not accepted the decision of the Jurisdictional High Court on the issue and filed SLP before the Hon'ble Supreme Court. We are of the view that even on the basis of said findings the AO the issue is fully covered in favour of the assessee and deserves to be deleted.
8. In the present case, we also find that the money received by the assessee from TCMSPL were used to meet its trading commitments on the stock exchange and similar assistance was rendered to TCMSPL which was also used by the said company to meet its trading commitments on stock exchange for doing business. Similar assistance was rendered to TCMSPL to meet its trading 9 ITA No.5961/M/2016 commitments to stock exchange. It has been clearly decided by the Hon'ble Delhi High Court in the cases of Creative Dyeing and Printing P Ltd (supra) that the provisions of section 2(22)(e) of the Act, were not applicable to the business transactions. On the second plea taken by the ld.AR that the dividend if at all considered as income then has to be treated as deemed dividend u/s 2(22)(e) of the Act then only be added in the hands of shareholder and not in the hands of the assessee who is not holding requisite shares in TCMSP. The issue is now covered by the ratio laid down by the decision in the case of M/s Universal Medicare Pvt.Ltd (supra), Impact Containers P Ltd (supra), wherein it has been held that the advances received by the assessee from the companies having reserved accumulated profit could only be added in the hands of the registered shareholder who is entitled to received dividend and not in the hands of any other business entity. We therefore are of the view that the ratio laid down by the various High Courts including the jurisdictional High Court are inclined to set aside the order of the ld.CIT(A) and direct thee AO to delete the addition by holding that the provisions of section 2(22)(e) of the Act are not attracted in the case of business transactions and also the assessee is not holding 10% of the share holding in TCMSP.
10ITA No.5961/M/2016
9. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 24th April, 2017.
Sd sd (D.T.GARASIA) (RAJESH KUMAR) Judicial Member Accountant Member मुंबई Mumbai; ददन ुंक Dated : 24.4.2017 Sr.PS:SRL:
आदे श की प्रतिलऱपि अग्रेपिि/Copy of the Order forwarded to :
1. अपीऱाथी / The Appellant
2. प्रत्यथी / The Respondent
3. आयकर आयुक्त(अपीऱ) / The CIT(A)
4. आयकर आयुक्त / CIT - concerned
5. ववभागीय प्रतततनधि, आयकर अपीऱीय अधिकरण, मुंबई / DR, ITAT, Mumbai
6. गाडड फाईऱ / Guard File आदे श नस र/ BY ORDER, True copy उि/सह यक िुंजीक र (Dy./Asstt. Registrar) आयकर अिीऱीय अधिकरण, मुंबई / ITAT, Mumbai