MAIND INVESTMENT P. LTD, MUMBAI v. DCIT 3(2), MUMBAI

ITA 2537/MUM/2009 | 2006-2007
Pronouncement Date: 19-01-2011 | Result: Allowed

Appeal Details

RSA Number 253719914 RSA 2009
Assessee PAN AAACM5657J
Bench Mumbai
Appeal Number ITA 2537/MUM/2009
Duration Of Justice 1 year(s) 8 month(s) 29 day(s)
Appellant MAIND INVESTMENT P. LTD, MUMBAI
Respondent DCIT 3(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 19-01-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 19-01-2011
Date Of Final Hearing 11-01-2011
Next Hearing Date 11-01-2011
Assessment Year 2006-2007
Appeal Filed On 20-04-2009
Judgment Text
1 IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH MUMBAI BEFORE SHRI RAJENDRA SINGH(AM) AND SHRI VIJAY PAL RAO (JM) ITA NO.2537/M/2009 ASSESSMENT YEAR 2006-07 M/S.MAIND INVESTMENT PVT. LTD. THE DCIT 3(2) MUM BAI BAKHTAVAR 11 TH FLOOR NARIMAN POINT MUMBAI 400 021. PAN : AAACM 5657 J APPELLANT RESPONDENT ASSESSEE BY : SHRI DILIP J. THAKKAR/RAJESH P . SHAH REVENUE BY : SHRI S.K.SINGH O R D E R PER RAJENDRA SINGH (AM) THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 26.3.2009 OF CIT(A) FOR THE ASSESSMENT YEAR 2006-07 . THE ASSESSEE IN THIS APPEAL HAS RAISED DISPUTES ON TWO DIFFERENT GROUNDS . 2. THE FIRST DISPUTE IS REGARDING DISALLOWANCE OF E XPENDITURE UNDER SECTION 14A OF THE INCOME-TAX ACT IN RESPECT OF EXEMPT INCO ME. THE AO DURING THE ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD RECEIVED DIVIDEND INCOME OF RS.4 13 677/- AND LONG TERM CAPITAL GAIN OF RS.2 2 11 348/- WHICH WERE EXEMPT FROM TAX. THE AO THEREFORE DISALLOWED THE EX PENSES RELATING TO THE EXEMPT INCOME WHICH WAS COMPUTED BY HIM UNDER RULE 8D OF THE INCOME-TAX RULE AT RS.1 38 658/-. IN APPEAL THE ASSESSEE SUBMI TTED THAT THE ENTIRE FUND WAS BEING MANAGED THROUGH PORTFOLIO MANAGER AND NO EXPENDITURE WAS 2 INCURRED BY THE ASSESSEE. CIT(A) HOWEVER DID NOT AC CEPT THE CONTENTION RAISED AND HELD THAT THE DISALLOWANCE HAD TO BE MADE UNDER RULE 8D AND ACCORDINGLY UPHELD THE ORDER OF AO AGGRIEVED BY WHICH THE ASSES SEE IS IN APPEAL BEFORE THE TRIBUNAL. 2.1 WE HAVE HEARD BOTH THE PARTIES PERUSED THE REC ORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOW ANCE OF EXPENDITURE RELATING TO THE DIVIDEND INCOME AND LONG TERM CAPITAL GAIN W HICH WERE EXEMPT. UNDER THE PROVISIONS OF SECTION 14(2) AND 14(3) THE EXPEN DITURE RELATING TO EXEMPT INCOME HAS TO BE COMPUTED AS PER METHOD PRESCRIBED BY THE GOVERNMENT. THE CBDT HAS SINCE NOTIFIED THE RULE BEING RULE NO.8D S PECIFYING THE MANNER FOR COMPUTATION OF EXPENSES RELATING TO THE EXEMPT INCO ME. THE SPECIAL BENCH OF THE TRIBUNAL IN CASE OF DAGA CAPITAL MANAGEMENT PVT . LTD. (119 TTJ 289) HAD EARLIER HELD THAT RULE 8D HAD RETROSPECTIVE APPLICA TION. HOWEVER THE SAID VIEW OF THE TRIBUNAL HAD RECENTLY BEEN NOT UPHELD BY THE HO NBLE HIGH COURT OF MUMBAI IN CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. (3 28 ITR 81) IN WHICH IT WAS HELD THAT RULE 8D WOULD APPLY ONLY FROM ASSESSMENT YEAR 2008-09. IN RESPECT OF PRIOR YEARS THE HONBLE HIGH COURT HELD THAT DI SALLOWANCE OF EXPENDITURE WHETHER DIRECT OR INDIRECT HAD TO BE MADE ON A REAS ONABLE BASIS AFTER GIVING OPPORTUNITY OF HEARING TO THE ASSESSEE. IN THIS CAS E THE DISALLOWANCE HAS BEEN MADE FOLLOWING RULE 8D WHICH IS NOT APPLICABLE TO T HE RELEVANT YEAR. WE THEREFORE SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE MATTER BACK TO AO FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION I N THE LIGHT OF JUDGMENT OF HONBLE HIGH COURT OF MUMBAI IN CASE OF GODREJ & BO YCE MANUFACTURING CO. LTD. (SUPRA) AND AFTER ALLOWING OPPORTUNITY OF HEARING T O THE ASSESSEE. 3 3. THE SECOND DISPUTE IS REGARDING ADDITION OF RS.8 5 13 982/- UNDER SECTION 2(22)(E) OF THE INCOME-TAX ACT. THE AO NOTED THAT T HE ASSESSEE COMPANY HAD TAKEN LOAN OF RS.85 13 983/- FROM M/S. ARIES EXPORT S PVT. LTD. THE AO ALSO NOTED THAT ONE OF THE SHAREHOLDERS OF THE ASSESSEE COMPANY I.E. MR. MAYUR MADHWANI WHO WAS HOLDING 53.76% OF SHARES IN THE AS SESSEE COMPANY WAS ALSO HOLDING 51.63% IN M/S. ARIES EXPORTS PVT. LTD. AO THEREFORE ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE LOAN TAKEN SHOULD NOT BE TREATED AS DEEMED INCOME UNDER SECTION 2(22)(E). THE ASSESSEE EXPLAIN ED THAT THE LOAN HAD BEEN TAKEN FOR INVESTMENT IN PORTFOLIO MANAGEMENT AND TH E INCOME OFFERED TO TAX. THE AO HOWEVER DID NOT ACCEPT THE EXPLANATION. IT W AS OBSERVED BY HIM THAT THE PROVISIONS OF SECTION 2(22)(E) WERE APPLICABLE. IT WAS ALSO NOTED BY HIM THAT FREE RESERVE OF M/S. ARIES EXPORTS PVT. LTD. A S ON 31.3.2006 WAS RS.2.55 CRORES WHICH WAS MUCH MORE THAN THE LOAN TAKEN. HE THEREFORE ADDED THE SUM OF RS.85 13 982/- AS DEEMED INCOME OF THE ASSESSEE. 3.1 THE ASSESSEE DISPUTED THE DECISION OF THE AO A ND SUBMITTED BEFORE CIT(A) THAT M/S. ARIES EXPORTS PVT. LTD. HAD ADVANC ED THE MONEY IN THE NORMAL COURSE OF BUSINESS. IT WAS ALSO SUBMITTED THAT THE ASSESSEE COMPANY WAS NOT HOLDING SUBSTANTIAL INTEREST IN M/S. ARIES EXPORTS PVT. LTD. AND THEREFORE THERE COULD NOT BE ANY DEEMED INCOME. IT WAS ALSO SUBMITT ED THAT SHAREHOLDING OF THE ASSESSEE COMPANY IN M/S. ARIES EXPORTS PVT. LTD . WAS ONLY 4.3% WHICH WAS MUCH LESS THAN 10% AS REQUIRED UNDER SECTION 2(22)( E). THEREFORE NO ADDITION COULD BE MADE IN CASE OF THE ASSESSEE. THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN CA SE OF BHAUMIK COLOR (P) LTD (313 ITR (AT) 146). CIT(A) DID NOT ACCEPT THE CONTE NTION RAISED. IT WAS OBSERVED BY HIM THAT THE CASE OF THE ASSESSEE IS CO VERED THE SECOND LIMP OF SECTION 2(22)(E) IN WHICH PAYMENT MADE TO ANY CONCE RN IN WHICH THE 4 SHAREHOLDER IS MEMBER OR PARTNER OR IN WHICH HE HAS SUBSTANTIAL INTEREST IS ALSO DEEMED AS DIVIDEND INCOME. HE NOTED THAT SHRI MAYUR MADHWANI WAS HAVING SUBSTANTIAL INTEREST IN THE ASSESSEE COMPANY AS WEL L AS PAYEE COMPANY AND THEREFORE ADDITION IN CASE OF THE ASSESSEE COMPANY WAS JUSTIFIED. HE ACCORDINGLY UPHELD THE ADDITION MADE BY THE AO AGGR IEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 4. BEFORE US THE LEARNED AR FOR THE ASSESSEE REITER ATED THE EARLIER SUBMISSION THAT SHAREHOLDING OF THE ASSESSEE COMPAN Y IN M/S.ARIS EXPORTS PVT. LTD. WAS ONLY 4.3% AND THEREFORE PROVISIONS OF SECT ION 2(22)(E) WAS NOT APPLICABLE. THE LEARNED DR ON THE OTHER HAND SUPPO RTED THE ORDER OF CIT(A). 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE R IVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ADDITION ON ACC OUNT OF DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE INCOME-TAX ACT. THE S AID PROVISION IS REPRODUCED BELOW AS READY REFERENCE. (E) ANY PAYMENT BY A COMPANY NOT BEING A COMPANY I N WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED OF ANY SUM (WH ETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) [ MADE AFTER THE 31 ST DAY OF MAY 1987 BY WAY OF ADVANCE OR LOAN TO SHAR EHOLDER BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT B EING 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 CL AUSE REFERRED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF OR FOR THE 5 INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFIT S; 5.1 THE ASSESSEE COMPANY HAD RECEIVED LOAN OF RS.85 13 982/- FROM M/S. ARIES EXPORTS PVT. LTD. THE ASSESSEE COMPANY WAS A REGISTERED SHAREHOLDER OF M/S. ARIES EXPORTS PVT. LTD. HAVING 4.3% SHAREHOLDI NG. ANOTHER PERSON I.E. MR. MAYUR MADHWANI WAS HOLDING 53.76% SHARE IN THE ASSE SSEE COMPANY AND 51.63% IN M/S. ARIES EXPORTS PVT. LTD. SINCE MR. MA YUR MADHWANI WAS HAVING SUBSTANTIAL INTEREST IN M/S. ARIES EXPORTS PVT. LTD . AND ALSO IN THE ASSESSEE COMPANY THE AUTHORITIES BELOW HAVE TREATED THE LOAN TAKEN BY THE ASSESSEE COMPANY FROM M/S. ARIES EXPORTS PVT. LTD. AS DEEMED DIVIDEND. IN OUR VIEW ACTION OF THE AUTHORITIES BELOW IS NOT JUSTIFIED. T HE PROVISIONS OF SECTION 2(22)(E) REPRODUCED ABOVE VISUALIZE THREE DIFFERENT SITUATIONS. IN THE FIRST SITUATION LOAN TAKEN BY A PERSON FROM A COMPANY IN WHICH HE HAS SHAREHOLDING HAVING NOT LESS THAN 10% OF VOTING POWER HAS TO BE TREATED AS DEEMED DIVIDEND IN CASE OF SUCH PERSON. THE CASE OF THE AS SESSEE IS NOT COVERED BY THIS SITUATION AS THE ASSESSEE IS NOT HAVING SHAREHOLDIN G HAVING MINIMUM VOTING POWER OF 10%. IN THE SECOND SITUATION IF A SHAREHO LDER HAVING NOT LESS THAN 10% VOTING POWER HAS SUBSTANTIAL INTEREST IN ANOTHE R CONCERN THEN THE LOAN TAKEN BY THE OTHER CONCERN FROM THE COMPANY IN WHIC H SAID SHAREHOLDER WAS HOLDING SHARES CAN BE TREATED AS DEEMED DIVIDEND BU T DEEMED DIVIDEND IN SUCH CASES HAD TO BE ASSESSED ONLY IN THE NAME OF SUCH S HAREHOLDER HAVING SHAREHOLDING WITH NOT LESS THAN 10% VOTING POWER IN THE LENDER COMPANY. THIS VIEW IS SUPPORTED BY THE DECISION OF THE SPECIAL BE NCH OF TRIBUNAL IN CASE OF BHOUMIK COLORS LTD. (SUPRA). IN THE PRESENT CASE T HE LENDER COMPANY HAS NOT MADE PAYMENT TO ANY CONCERN IN WHICH THE ASSESSEE C OMPANY HAS SUBSTANTIAL INTEREST. IN FACT THE PAYMENT HAS BEEN MADE TO THE ASSESSEE COMPANY ITSELF. 6 BUT SINCE THE ASSESSEE COMPANY IS NOT HAVING THE RE QUISITE SHAREHOLDING DEEMED DIVIDEND CANNOT BE ASSESSED IN THE NAME OF T HE ASSESSEE COMPANY. PROBABLY A CASE COULD HAVE BEEN MADE FOR ASSESSING DEEMED DIVIDEND IN CASE OF MR. MAYUR MADHWANI BECAUSE HE WAS HAVING SUBSTAN TIAL INTEREST IN THE ASSESSEE COMPANY TO WHOM THE LOAN HAD BEEN GIVEN BY M/S. ARIES EXPORTS PVT. LTD BECAUSE HE WAS ALSO HAVING SUBSTANTIAL SHAREHOL DING IN THE LATTER. BUT IN OUR VIEW NO ADDITION CAN BE MADE AS DEEMED DIVIDEND IN CASE OF THE ASSESSEE COMPANY WHICH DOES NOT HAVE MINIMUM SHAREHOLDING HA VING 10% VOTING POWER IN THE LENDER COMPANY. THE THIRD SITUATION RE LATES TO A CASE WHERE PAYMENT HAS BEEN MADE ON BEHALF OF ASSESSEE FOR THE BENEFIT OF THE SHAREHOLDER WHICH ALSO IS NOT APPLICABLE IN THIS C ASE. WE ARE THEREFORE UNABLE TO SUSTAIN THE ORDER OF CIT(A) MAKING ADDITION IN C ASE OF THE ASSESSEE. THE SAME IS SET ASIDE AND THE ADDITION MADE IS DELETED. 6. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLO WED. 7. THE ORDER WAS PRONOUNCED IN OPEN COURT ON 19.01 .2011. SD/- SD/- ( VIJAY PAL RAO) (RAJEN DRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE : 19.01.2011 AT :MUMBAI COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) MUMBAI CONCERNED 4. THE CIT MUMBAI CITY CONCERNED 5. THE DR B BENCH ITAT MUMBAI // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI ALK 7