IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH "I", MUMBAI BEFORE SHRI D. K. AGAR WAL, J.M. AND SHRI A.L. GEHLOT, A. M. ITA No. 1496/M/2009 Assessment Year: 2005-06 Dy. Commissioner of Income-tax, ... Appellant Circle 4(2), Room No. 642, 6 t h Floor, Aayakar Bhavan, M.K. Road, Mumbai - 20 Vs. M/s India Capital Market Pvt. Ltd., ...Respondent 3/F-2, Court Chambers, 35, New Marine Lines, Mumbai - 400 020. ITA No. 949/M/2009 Assessment Year: 2005-06 M/s India Capital Market Pvt. Ltd., ... Appellant 3/F-2, Court Chambers, 35, New Marine Lines, Mumbai - 400 020. Vs. Dy. Commissioner of Income-tax, ... Respondent Circle 4(2), Room No. 642, 6 t h Floor, Aayakar Bhavan, M.K. Road, Mumbai - 20 Revenue by : Mr. Ajaykumar Srivastava Respondent by : Mr. A.V. Sonde ORDER
PER A.L. GEHLOT, A.M.
These are the cross appeals directed against the order of CIT(A) - IV, Mumbai, passed on 17.12.2008 for the assessment year 2005-06.
2. 1 s t common ground raised in these appeals is in respect of section 2(22)(e) of the Act, which covers ground Nos. 1 to 3 of revenue's appeal and Ground No. 1 assessee's appeal.
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3. Briefly, the facts relating to this ground are that during the course of assessment proceedings, the AO noticed that the assessee received a loan of Rs. 35,00,000/- from M/s Yogesh Securities Pvt. Ltd. (in short YSPL) and Rs. 14,00,000/- from Niche Financial Services (P) Ltd. (in short NFSPL) both of which are its sister concerns. The shareholding pattern of the assessee company as well as M/s YSPL & NFSPL was found by the AO that Mr. Nirad D. Mehta a shareholder in the assessee company was holding 17.34% of the total equity in NFSPL while another shareholder, namely, Friendly Financial Services of the assessee company was holding 27.5% in YSPL. The AO further noticed that these shareholders of the assessee company had a substantial interest in the assessee company while they had beneficial interest in the companies from which the assessee had received loan. The shares held by them were accompanied with equivalent voting rights. The shareholding summarized in CIT(A)'s order at page 5 is reproduced below:-
Shareholder Share holding Yogesh Niche of the in the Securities Pvt. Financial assessee assessee Ltd. Services Pvt. company company Ltd. Nirad Mehta 52% NIL 17.345 Friendly 25% 27% NIL Financial Services Ltd. Reserves Rs. Rs. and Surplus 2,57,37,114 23,36,59,955 4. The AO held that both shareholders of the assessee company were beneficial shareholders in YSPL and NFSPL
respectively. Simultaneously, they were substantial interest in the assessee company. Therefore, he treated the loan amount as deemed dividend u/s 2(22)(e) of the Act.
5. The CIT(A) confirmed the addition of Rs. 35,00,000/- made by the AO in case of YSPL after rejecting assessee's contention that the amount was on account inter-corporate deposit and ISD are not loans but deposits. The CIT (A) examined the contention of the assessee that the amounts were received in the ordinary course of business where lending money is substantially part of the business 3 ITA NO. 1496 & 949/M/2009 M/s India Capital Market Pvt. Ltd.
of YSPL. The CIT(A) noted that it is not a company which is registered as Non Banking Financial Institution. The CIT(A) did not accept the assessee's contention that 61% of its amounts are blocked for money lending business and 44% of the amounts were blocked as a percentage of total funds blocked in business is baseless. The CIT(A) noted that reserves and surplus of YSPL is at Rs. 31.59 crores, share capital is at Rs. 23 crores and the total fund is at Rs. 54.59 crores. Out of the same, very small part of the funds i.e. loan to other of Rs. 48 lacs have been given as loan. The CIT(A) calculated the position of the funds employed for the business and advances of loans made by the assessee company at 6.54% for the year ended 31.3.2005 and 5.38% for the year ended at 31.03.2004. On the basis of the above analysis, the CIT(A) rejected the assessee's contention that YSPL is not a concern whose substantial part of business is lending of money. The CIT(A) held that all the conditions of provisions of section 2(22)(e) are applicable in respect of the amount received by the assessee from YSPL. The CIT(A) further held that even return of loan by the assessee to YSPL on 28.09.2004 is not of much relevance in view of Hon'ble Supreme Court decision of Ms.P. Sharda Vs. CIT 96 Taxman 11(SC).
5.1 The CIT(A) examined the case of NFSPL and found that NSFSP had given the said amount in the ordinary course of business where the lending business is substantially part of the business of the company. The CIT(A) analysed this aspect at pages 33 & 34 of his order and found that 66.19% and 57.83% of the funds are employed as on 31.03.04 and 31.03.05, the lending money is treated to be substantial part of the business of the company. The CIT(A) deleted the said addition in view of clause (ii) to section 2(22)(e), such advances or loan is not dividend.
5.2 The assessee is in appeal against the order of CIT(A) where he confirmed the addition of Rs. 35,00,000/- while the revenue is in appeal where the CIT(A) has deleted the addition of Rs.14,00,000/-.
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6. The learned AR submitted that the amount received was on account of inter corporate deposit (ICD), therefore, the assessee was liable to pay interest on such ICD. The assessee is required to refund the tax deducted at source on the amount of interest as provided under Chapter XVII of IT Act. In support of the contention, the learned AR relied upon various provisions of the Companies Act and Audit Report under the Companies Act. The learned AR has also relied upon the following decisions:-
1. Bombay Oil Industries Ltd. Vs. DCIT, 28 SOT 383 (Mum.)
2. Durga Prasad Mandelia and Others V. Registrar of Companies, 61 Company Cases, 479.
3. Jhamu U. Sughand Vs. DCIT, 99 ITD 1 (Mum.)
4. CIT Vs. Nagindas M. Kapadia, 177 ITR 393 (Bom.)
5. Mrs. Rekha Modi Vs ITO, 13 SOT 512 (Delhi)
7. On the basis of above submissions, the learned AR submitted that these are not loans and advances, therefore, section 2(22)(e) of the Act, is not applicable. He further submitted that the amounts were given in the ordinary course of business, therefore, it falls under the exception to the section 2(22)(e) of the Act. The alternate submission of the learned AR is that the assessee is neither beneficial nor the shares were registered in the name of the assessee company. The learned AR in support of his contention relied upon the decision of the Special Bench of ITAT in the case of ACIT Vs. Bhaumik Colour (P.) Ltd., 118 ITD 1(SB).
8. The learned DR, on the other hand, relied upon the order of AO and submitted that these are the clear cut cases of the loans and advances, therefore, section 2(22)(e) is clearly applicable. The learned DR submitted that it is true that if these are the deposits then section 2(22)(e) is not applicable. But these are the loans and advances and what are the understandings between the parties is not of much relevance. The learned DR submitted that the assessee submitted something and orally stating different thing and the assessee has not produced any agreement in support of the 5 ITA NO. 1496 & 949/M/2009 M/s India Capital Market Pvt. Ltd.
transactions. The learned DR submitted that according to repayment schedule and confirmation filed by the assessee, it is clearly established that these are short-term loans. The learned DR submitted that the provisions of the Companies Act and audit report therein pointed out by the learned AR are not a conclusive proof.
9. We have heard the learned representatives of the parties and perused the record. The admitted facts of the case are that the assessee is a private ltd. company, who is the shareholder neither in YSPL nor in NFSPL. The case of the revenue is that Shri Nirad D. Mehta, the shareholder in the assessee company and another shareholder Friendly Financial Services of the assessee company both were holding substantial shareholding in YSPL and NFSPL. On the basis of these admitted facts, first we shall examine whether the assessee company who is not a registered shareholder of YSPKL and NFSPL whether provisions of section 2(22)(e) is applicable or not. An identical issue has been examined by the Hon'ble Rajasthan High court in the case of CIT Vs. Hotel Hilltop, 313 ITR 116 (Raj.). Briefly facts of that case are that the assessee M/s Hotel Hilltop is a partnership firm. The firm received Rs. 10.00 lakh from Hilltop Palace (P) Ltd. Two partners of the firm Hotel Hilltop are holding substantial interest in Hilltop Palaces (P) Ltd and partnership firm also. The shareholding pattern of the company and the firm is summarized below:-
"Shareholding pattern of M/s Hilltop Palace Hotels (P) Ltd.
1) Shri Roop Kumar Khurana 23.33% 2) Smt. Sarioj Khurana 4.67% 3) Vikas Khurana 22% 4) Deshbandhu Khurama 25% 5) Shri Rajiv Khurana 25%
Likewise, it is also not in dispute, that at the relevant time constitution of the firm was as under:-
Constitution of M/s Hotel Hilltop 1) Shri Roop Kumar Khurana 45% 2) Shri Deshabandhu Khurana 55% 6 ITA NO. 1496 & 949/M/2009 M/s India Capital Market Pvt. Ltd.
10. Under that circumstances, the Rajasthan High Court held that significant requirement of section 2(22)(e) is not shown to exist. The liability of tax as deemed dividend could be attracted in the hands of the individual, being shareholders, and not in the hands of the firm.
11. The ITAT Special Bench in the case of ACIT Vs. Bhaumik Colour (P.) Ltd., 118 ITD 1(SB) has discussed similar controversy vide paras 24,25, & 26, which are reproduced below:-
"24. The expression "shareholder being a person who is the beneficial owner of shares" referred to in the first limb of s. 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial then the provision of s. 2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the first limb of provisions of s. 2(22)(e) will not apply.
25. The new category of payment which was considered as dividend introduced by the Finance Act, 1987 w.e.f. 1st April, 1988 by the second limb of s. 2(22)(e) is payment "to any concern in which such shareholder is a member or a partner and in which he has a substantial interest". It is this category of payment with which we are concerned in this reference.
26. The following conditions are required to be satisfied for application of the above category of payment to be regarded as dividend. They are : (a) There must be a payment to a concern by a company. (b) A person must be a shareholder of the company being a registered holder and 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. This is because of the expression "such shareholder" found in the relevant provision. This expression only refers to the shareholder referred to in the earlier part of s. 2(22)(e) viz., a registered and a beneficial holder of shares holding 10 per cent voting power. The Hon ' ble Rajasthan High Court in the case of Union of India vs. Wazir Singh AIR 1980 Raj 252, while dealing with an expression "no such application" in the context of r. 97 of the Rajasthan High Court Rules, 1952 has held as follows : "Generally the word ' such ' refers only to previously indicated, characterized or specified. ' Such ' is an adjective meaning, the one previously indicated or refers only to something which has been said before." The Hon ' ble Allahabad High Court in the case of Mohan Lal & Anr. vs. Grain Chambers Ltd. AIR 1959 All 279 has held as follows : "In fact, it appears to us that the word ' such ' is used before a noun in a latter part of a sentence, the proper construction in 7 ITA NO. 1496 & 949/M/2009 M/s India Capital Market Pvt. Ltd.
the English language is to hold that the same noun is being used after the word ' such ' with all its characteristics which might have been indicated earlier in the same sentence." (c) The very same person referred to in (b) above must also be a member or a partner in the concern holding substantial interest in the concern viz., when the concern is not a company, he must at any time during the previous year, be beneficially entitled to not less than twenty per cent of the income of such concern; and where the concern is a company he must be the owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power. (d) If the above conditions are satisfied then the payment by the company to the concern will be dividend."
12. The Hon'ble jurisdictional High court in the case of Universal Medicare, 190 Taxman 144 (Bom.)while confirming the order of ITAT special bench in the case of Bhaumik Colour (P) Ltd., has held as under:-
"9. In order that the first part of clause (e) of section 2(22) is attracted, the payment by a company has to be by way of an advance or loan. The advance or loan has to be made, as the case may be, either to a shareholder, being a beneficial owner holding not less than ten per cent of the voting power or to any concern to which such a shareholder is a member or a partner and in which he has a substantial interest. The Tribunal in the present case has found that as a matter of fact no loan or advance was granted to the assessee, since the amount in question had actually been defalcated and was not reflected in the books of account of the assessee. The fact that there was a defalcation seems to have been accepted since this amount was allowed as a business loss during the course of assessment year 2006-07. Consequently, according to the Tribunal the first requirement of there being an advance or loan was not fulfilled. In our view, the finding that there was no advance or loan is a pure finding of fact which does not give rise to any substantial question of law. However, even on the second aspect which has weighed with the Tribunal, we are of the view that the construction which has been placed on the provisions of section 2(22)(e) is correct. Section 2(22)(e) defines the ambit of the expression 'dividend'. All payments by way of dividend have to be taxed in the hands of the recipient of the dividend namely the shareholder. The effect of section 2(22) is to provide an inclusive definition of the expression 'dividend'. Clause (e) expands the nature of payments which can be classified as a dividend. Clause (e) of section 2(22) includes a payment made by the company in which the public is not substantially interested by way of an advance or loan to a shareholder or to any concern to which such shareholder is a member or partner, subject to the fulfilment of the requirements which are spelt out in the provision. Similarly, a payment made by a company on behalf, of for the individual benefit, of any such shareholder is treated by clause (e) to be included in the expression 'dividend'. Consequently, the effect of clause (e) of section 8 ITA NO. 1496 & 949/M/2009 M/s India Capital Market Pvt. Ltd.
2(22) is to broaden the ambit of the expression 'dividend' by including certain payments which the company has made by way of a loan or advance or payments made on behalf of or for the individual benefit of a shareholder. The definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. Consequently in the present case the payment, even assuming that it was a dividend, would have to be taxed not in the hands of the assessee but in the hands of the shareholder. The Tribunal was, in the circumstances, justified in coming to the conclusion that, in any event, the payment could not be taxed in the hands of the assessee. We may in concluding note that the basis on which the assessee is sought to be taxed in the present case in respect of the amount of Rs. 32,00,000 is that there was a dividend under section 2(22)(e) and no other basis has been suggested in the order of the Assessing Officer.
10. For the aforesaid reasons, the first and second questions will not give rise to any substantial questions of law."
13. From the above discussion and after considering the judgment of jurisdictional High Court in the case of Universal Medicare cited supra, we find that the Hon'ble jurisdictional High court has clearly laid down that section 2(22)(e) is applicable in the case of deemed dividend only in the hands of shareholders. In the case under consideration, admittedly the assessee company is not shareholder of YSPL and NFSPL, therefore, in the light of judgment of jurisdictional High Court, we are of the considered view that deemed dividend u/s 2(22)(e) cannot be taken in the hands of the assessee. The addition of Rs. 35,00,000/- sustained in the case of YSPL by the CIT(A) is, therefore, deleted. Since we have decided the issue following the jurisdictional High Court whether under the facts and circumstances section 2(22)(e) dividend is taxable in the hands of the assessee, other contentions of the assessee in respect of ICD whether it is loan or advances or business purposes etc. become infructuous and we do not express any opinion on those contentions.
14. One more ground raised in assessee's appeal is in respect of addition of Rs. 1.00 lakh towards share trading loans.
15. During the course of assessment proceedings, the AO noticed that the assessee has declared loans from trading (speculation in shares) amounting to Rs. 14,11,994/-. The AO 9 ITA NO. 1496 & 949/M/2009 M/s India Capital Market Pvt. Ltd.
noted that the assessee has not apportioned the expenses incurred for speculation activities. The submission of the assessee is that no expenses have been incurred for speculation business and, therefore, there should not be any disallowance. The AO estimated Rs. 1.00 lakh pertained to share trading activities and made addition accordingly. The CIT(A) confirmed the addition.
16. The learned AR submitted that the AO has made ad-hoc disallowance which is not correct. The learned DR has relied upon the orders of revenue authorities.
17. We have heard the learned representatives of the parties and perused the record. The contention of the assessee that there were no expenses related to speculation transactions cannot be accepted. We are, therefore, of the view that expenses pertaining to the speculation transactions are to be considered for calculation of speculative profit/loss. The assessee did not apportion any amount towards speculative transaction. In this regards in principle we are of the view that expenditure related to speculation transactions are to apportion, therefore we do not find substance in assessee's submissions that there were no expenditure. The assessee did not furnish any details before the revenue authorities, under the circumstances the AO estimated such expenses of Rs. 1,00,000/-. There are no material furnished before us basis on which a different estimate can be made at this stage, we therefore, confirm the order of CIT(A) on this issue.
18. Now we shall decide the other grounds raised by the revenue in its appeal.
19. Ground Nos. 4 to 9 are in respect of disallowance on account of V-sat Charges, lease line and transaction charges.
20. The AO made the addition in respect of payments made on account of V-SAT, lease line and transaction charges amounting to Rs. 2,92,328/- on the ground that the assessee did not deduct tax 10 ITA NO. 1496 & 949/M/2009 M/s India Capital Market Pvt. Ltd.
at source. The CIT(A) examined the expenditure and deleted the said addition by observing that V-SAT and lease line charges are reimbursement charges paid by the members of stock exchange in lieu of infrastructure and trading facilities provided by the stock exchange. V-SAT and lease line charges are not payments, which come within the domain of fees for technical services and they are also not for any work done by NSE for the member broker. The TDS is, therefore, not deductible on the same. The CIT(A) relying on the decision of ITAT, Mumbai in ITA No. 1955/Mum/08 for AY 05-06 in case of Kotak Securities Vs. Addl. CIT vide order dated 26.08.2008 and held that the assessee is not liable to make tax deducted at source.
21. The learned representatives of the parties submitted that the issue is covered against the revenue by the following decisions:-
1. Kotak Securties Ltd. Addl. CIT, 25 SOT 440
2. CIT Vs. Bharati Cellular ltd., 319 ITR 139 (Delhi)
22. We have heard the learned representatives of the parties and perused the record. Since the issue is covered against the revenue by the said decisions, we confirm the order of CIT(A) on this count.
23. Ground No. 10 of revenue's appeal is against the action of the CIT(A) in deleting the addition of Rs. 30,984/- on account of interest to SEBI as per the SEBI Interest Liability Regularization Scheme, 2004.
24. The AO disallowed the said amount of Rs. 30,984/- on the ground that the said payment was for the prior period and hence not deductible. The CIT(A) deleted the said addition observing that the liability to pay 20% of disputed interest to SEBI has been utilized during FY 2004-05 in view of SEBI Interest Liability Regularization Scheme, 2004. The CIT(A) relied upon the judgment of Hon'ble Supreme Court in the case of Mahalaxmi Mills Co. Vs. 11 ITA NO. 1496 & 949/M/2009 M/s India Capital Market Pvt. Ltd.
CIT 3 (1980) Taxman 52 (SC) wherein it was held that interest payable on cess partakes the character of cess itself and is thus allowable on the basis of actual payment u/s 43B.
25. We have heard the learned representatives of the parties and perused the record. We do not find any infirmity in the order of CIT(A) wherein he has rightly been deleted the addition by following the Hon'ble Supreme Court decision in the case of Mahalaxmi Mills co. (supra). Therefore, we confirm the order of CIT(A) on this issue.
26. In the result, the appeal of the revenue is dismissed and the appeal of the assessee is partly allowed.
Order pronounced in the open court on this 30 t h day of July, 2010.
Sd/- Sd/- ( D. K. AGAR WAL ) (A.L. GEHLOT) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 30 th July, 2010. Copy to:- 1) The Appellant. 2) The Respondent. 3) The CIT (A) concerned. 4) The CIT concerned. 5) The Departmental Representative, "F" Bench, I.T.A.T., Mumbai. By Order //true copy// Asst. Registrar, IT.A.T., Mumbai. Kv