Sri P Raja Rao,, Visakhapatnam v. M/s ACIT, Circle-1(1), Visakhapatnam

ITA 371/VIZ/2007 | 2004-2005
Pronouncement Date: 25-01-2011 | Result: Dismissed

Appeal Details

RSA Number 37125314 RSA 2007
Assessee PAN AATPP2493B
Bench Visakhapatnam
Appeal Number ITA 371/VIZ/2007
Duration Of Justice 3 year(s) 5 month(s) 15 day(s)
Appellant Sri P Raja Rao,, Visakhapatnam
Respondent M/s ACIT, Circle-1(1), Visakhapatnam
Appeal Type Income Tax Appeal
Pronouncement Date 25-01-2011
Appeal Filed By Assessee
Order Result Dismissed
Bench Allotted DB
Tribunal Order Date 25-01-2011
Date Of Final Hearing 09-11-2010
Next Hearing Date 09-11-2010
Assessment Year 2004-2005
Appeal Filed On 10-08-2007
Judgment Text
ITA NOS.370 371 372 OF 07; 379&389 OF 10 VSKP IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV JUDICIAL MEMBER AND SHRI BR BASKARAN ACCOUNTANT MEMBER ITA NO. 370 & 371 /VIZAG/ 20 07 ASSESSMENT YEAR S : 1999 - 2000 & 2004 - 05 R ESPECTIVELY P. RAJA RAO VISAKHAPATNAM ACIT CIRCLE - 1(1) VISAKHAPATNAM (APPELLANT) VS. (RESPONDENT) PAN NO. AATPP 2493B ITA NO.372/VIZAG/2007 ASSESSMENT YEARS : 1999 - 2000 G. SRINIVASA RAO VISAKHAPATNAM ACIT CIRCLE - 1(1) VISAKHAPATNAM (APPELL ANT) VS. (RESPONDENT) PAN NO. ADYPG 4435G ITA NO. 379 /VIZAG/20 1 0 ASSESSMENT YEAR : 2001 - 02 G. SRINIVASA RAO VISAKHAPATNAM ACIT CIRCLE - 4 (1) VISAKHAPATNAM (APPELLANT) VS. (RESPONDENT) PAN NO.ADYPG 4435G ITA NO.380/VIZAG/2010 ASSESSMENT YEAR : 200 1 - 02 P. RAJA RAO VISAKHAPATNAM ACIT CIRCLE - 4(1) VISAKHAPATNAM (APPELLANT) VS. (RESPONDENT) PAN NO. AATPP 2493B APPELLANT BY: SHRI I. KAMA SHASTRI CA & SHRI G.V.N. HARI CA RESPONDENT BY: SHRI J. SIRI KUMAR SR. DR ORDER PER SHRI S.K. YADAV JU DICIAL MEMBER : - THESE APPEALS ARE PREFERRED BY THE ASSESSEES AGAINST THE RESPECTIVE ORDERS OF THE CIT(A). SINCE COMMON ISSUES ARE INVOLVED IN THESE APPEALS THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF THROUGH THIS CONSOLIDATED ORDER. ITA NOS.370 371 372 OF 07; 379&389 OF 10 VSKP 2 2. COMMON I SSUES INVOLVED IN THESE APPEALS RELATE TO AN ADDITION ON ACCOUN T OF DEEMED DIVIDEND U/S 2(22)(E) AND CONSEQUENTLY LEVYING DIFFERENTIAL TAX AND INTEREST INSTEAD OF TREATING THE LOAN ADVANCED BY THE COMPANY TO FIRM IN WHICH THE ASSESSEE IS INTERESTED AS INV ESTMENT. SINCE THE FACTS IN ALL APPEALS ARE ALMOST SIMILAR EXCEPT THE QUANTUM OF ADDITIONS WE PREFER TO REPRODUCE THE FACT IN THE CASE OF SHRI P. RAJA RAO IN ITA NO.370 OF 2007. 3. IN ITA NO.370 OF 2007 & 371 OF 2007 ASSESSEE HAS ALSO RAISED THE ADDIT IONAL GROUND ASSAILING THE VALIDITY OF THE REOPENING OF THE ASSESSMENT U/S 147 OF THE I.T. ACT. 4 . WITH REGARD TO THE REOPENING OF THE ASSESSMENT THE LD. COUNSEL FOR THE ASSESSEE HAS SUBM ITTED THAT BEFORE REOPENING THE ASSESSMENT THE ASSESSING OFFICER HA S NOT OBTAINED THE APPROVAL FROM THE COMPETENT AUTHORITY AS REQUIRED UNDER LAW BEFORE REOPENING THE ASSESSMENT. THEREFORE THE REOPENING IS NOT VALID. THE LD. D.R. DURING THE COURSE OF HEARING HAS PRODUCED THE PROPER APPROVAL OBTAINED BY THE A.O. FROM TH E COMPETENT AUTHORITY BEFORE REOPENING THE ASSESSMENT. THEREFORE WE D O NOT FIND ANY FORCE IN THESE CONTENTIONS OF THE ASSESSEES. MOREOVER THIS GROUND WAS NEVER R AISED BEFORE THE CIT(A) . I T IS RAISED FIRST TIME BEFORE THE TRIBUNAL. WE HOWEVER CAREFUL LY EXAMINED THE ORDER OF THE LOWER AUTHORITIES AND WE FIND THE ASSESSMENT WAS ORIGINALLY FRAMED U/S 143(1) IN THE CASE OF P. RAJA RAO PERTAINING TO THE ASSESSMENT YEAR 1999 - 2000 IN ITA NO.270 OF 2007 . H AVING NOTED THAT THE ASSESSEE IS ONE OF THE DIRECTOR OF M/S. PRATYUSHA AQUA PRIVATE LIMITED AND PARTNER IN PRATYUSHA ASSOCIATES TO WHOM M/S. PRATYUSHA PRIVATE LTD. H AS ISSUED AN AMOUNT OF RS.24 74 258/ - EITHER AS A LOAN OR ADVANCE THE A.O. HAS FORMED A BELIEF THAT THE ADVANCE GIVEN TO THE FIRM TO BE TREAT ED AS A DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE BEING A SHARE HOLDER IN THE COMPANY AND ACCORDINGLY REOPENED THE ASSESSMENT U/S 147 OF THE ACT. SINCE THE ORIGINAL INTIMATION WAS ISSUED U/S 143(1) THERE WAS NO APPLICATION OF THE MIND OF THE A.O. AT THAT TIME . T HEREFORE HE HAS A REASONABLE BELIEF TO REOPEN THE ASSESSMENT U/S 147 OF THE ACT IN THE LIGHT OF THE JUDGEMENT OF THE APEX COURT IN THE CASE OF ACIT VS. RAJESH JAVERI STOCK BROKERS 291 ITR 500 (SC). WE THEREFORE FIND NO INFIRMITY IN THE REOP ENING OF THE ASSESSMENT. ITA NOS.370 371 372 OF 07; 379&389 OF 10 VSKP 3 5 . ON MERIT THE FACTS BORNE OUT FROM THE ORDERS OF THE AUTHORITIES BELOW IN THE CASE OF P. RAJA RAO FOR A.Y. 1999 - 2000 WHICH IS TO BE TREATED AS A LEAD CASE ARE THAT ASSESSEE IS A DIRECTOR AND SHARE HOLDER OF M/S. PRATYUSHA AQUA P VT. LTD. (PAPL) AS WELL AS THE PARTNER IN M/S. PRATYUSHA ASSOCIATES (PA) HAVING 55% SHARES IN THE PARTNERSHIP FIRM. FOR THE ASSESSMENT YEAR 1999 - 2000 THE ASSESSEE FILED THE RETURN OF INCOME DISCLOSING AN INCOME OF RS.8 44 900/ - . DURING THE COURSE OF ASS ESSMENT PROCEEDINGS THE A.O. NOTICED THAT AN AMOUNT OF RS.24 74 258/ - WAS ADVANCED AS A LOAN BY PAPL TO PA DURING THE RELEVANT PREVIOUS YEAR . S INCE THE SAID COMPANY I.E. PAPL HAD NOT DECLARED ANY DIVIDEND AS WAS EVIDENT FROM THE COPY OF THE ANNUAL REPORT DURING THE RELEVANT PREVIOUS YEAR T HE A.O. PRIMA - FACIE CONCLUDED THAT AMOUNT OF SUCH ADVANCE MADE TO PA REPRESENTS DEEMED DIVIDEND WITHIN THE MEANING OF SECTION 2(22)(E) AS TWO OF THE DIRECTORS PAPL ARE ALSO PARTNERS OF PA. ACCORDINGLY TH E INCOME CHAR GEABLE TO TAX HAS ESCAPED ASSESSMENT AND THE A.O. ISSUED NOTICE U/S 148 OF THE ACT. IN RESPONSE THERETO IT WAS STATED BY THE ASSESSEE THAT THE RETURN ALREADY FILED MAY BE TREATED AS THE RETURN FILED IN RESPONSE TO NOTICE U/S 148 OF THE ACT. THEREAFTER AFTER PROVIDING ADEQUATE OPPORTUNITY TO THE ASSESSEE THE ASSESSING OFFICER TREATED THE SAID AMOUNT OF LOAN ADVANCED TO PA AS DEEMED DIVIDEND. HOWEVER IN THE COURSE OF ASSESSMENT PROCEEDINGS THE A.O. FOUND THAT NET AMOUNT ADVANCED TO PA WAS RS.12 54 640 / - . SINCE THE ASSESSEE OWNED 55 % SHARE OF PA THE ASSESSING OFFICER TREATED 55% OF RS.12 54 640/ - AMOUNTING TO RS.6 90 052/ - AS THE INCOME OF THE ASSESSEE BY WAY OF A DIVIDEND INCOME. 6 . THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) AND REITERATED I TS CONTENTIONS. THE CONTENTIONS OF THE ASSESSEES WERE HOWEVER SUMMARIZED BY THE CIT(A) AS UNDER: - I. THE DEBIT BALANCE WAS RETAINED BY PAPL WITH PA FOR THE PURPOSE OF INVESTING AS SHARE CAPITAL IN THE LATTER. PA WAS IN THE PROCESS OF RESTRUCTURING AND WAS P ROPOSED TO BE INCORPORATED AS A PRIVATE LIMITED COMPANY. HOWEVER ON ACCOUNT OF OBJECTIONS RAISED BY THE PORT AUTHORITIES REGARDING TRANSFER OF STEVEDORING LICENSE OF PA THE PROPOSAL GOT INORDINATELY DELAYED. II. DURING FEBRUARY 2005 RELEVANT TO ASSESMENT YEAR 2005 - 06 PAPL WAS FINALLY INDUCTED AS PARTNER IN PA AND OUT OF ITA NOS.370 371 372 OF 07; 379&389 OF 10 VSKP 4 THE DEBIT BALANCE OF PAPL WITH PA A SUM OF RS.2 50 00 000/ - WAS INDUCTED AS PARTNERS CAPITAL. THE SAID AMOUNT IS REFLECTED IN THE BALANCE SHEET OF PAPL AS ON 31 ST MARCH 2005 UNDER INVE STMENTS. III. IN AUGUST 2005 RELEVANT TO ASSESSMENT YEAR 2006 - 07 THE PARTNERSHIP FIRM PA WAS CONVERTED INTO A PRIVATE LIMITED COMPANY UNDER THE NAME AND STYLE OF M/S. PRATHYUSHA ASSOCIATES SHIPPING PRIVATE LIMITED (PASPL) AND THE ERSTWHILE PARTNERS OF PA WE RE INDUCTED AS SHAREHOLDERS OF THE NEW COMPANY. CONSEQUENTLY THE ENTIRE DEBIT BALANCE OF PAPL OF RS.2 52 73 500/ - WAS CONVERTED INTO EQUITY SHARES IN THE NEW COMPANY PASPL AND ACCORDINGLY 25 27 350 EQUITY SHARES OF RS.10/ - EACH BEARING SHARE DISTINCTIVE NUMBERS 014447551 016974900 WERE ALLOTTED TO PAPL. IV. SHARE APPLICATION MONEY RECEIVED FROM A CLOSELY HELD COMPANY COULD NOT BE CONSTRUED AS LOAN OR ADVANCE AND THEREFORE SECTION 2(22)(E) IS NOT ATTRACTED. FOR THE ABOVE PROPOSITION RELIANCE WAS PLACED UPO N THE DECISION OF HONBLE ITAT DELHI E - BENCH IN THE CASE OF ARDEE FINVEST (P) LTD. VS. DCIT REPORTED IN 79 ITD 547. V. PAPL WAS MAINTAINING A RUNNING ACCOUNT WITH PA FOR UNDERTAKING THE EXPENDITURES INCURRED BY PA ON BEHALF OF PAPL. PAYMENTS MADE AS ADV ANCE TOWARDS EXPENDITURES INCURRED BY ANOTHER CONCERN CANNOT BE TREATED AS DEEMED DIVIDEND. IN THIS CONTEXT RELIANCE WAS PLACED UPON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. NAGINDAS M KAPADIA REPORTED IN 177 ITR 393. 7 . THE CIT RE - EXAMINED THE ISSUE IN THE LIGHT OF ASSESSEES CONTENTION BUT WAS NOT CONVINCED WITH IT. HE ACCORDINGLY HELD THAT THE ABOVE AMOUNT OF RS.12 54 640/ - REPRESENTS A DEEMED DIVIDEND WITHIN THE MEANING OF SECTION 2(22)(E) OF THE ACT AND ASSESSING OFFICER IS JUSTIFIED IN TREATING THE SAME AS SUCH. HE HAS ALSO APPROVED THE ACTION OF THE A.O. FOR ADOPTING 55% OF THE SAME AMOUNT AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEES. THE RELEVANT OBSERVATION OF THE CIT(A) ARE EXTRACTED HEREUNDER: 4. I HAVE CAREFUL LY EXAMINED THE FACTS OF THE CASE THE LAW RELATING TO DEEMED DIVIDEND AND THE ARGUMENTS OF THE AUTHORISED REPRESENTATIVE OF THE APPELLANT. BEFORE GOING INTO THE FACTS OF THE CASE IT WOULD BE APPROPRIATE TO RECAPITULATE THE PROVISIONS RELATING TO TAXABILI TY OF DEEMED DIVIDEND. REGARDING THE REASONS FOR ENACTING SECTION 2(22)(E) OF THE ACT THE HONBLE SUPREME COURT IN THE CASE OF ITA NOS.370 371 372 OF 07; 379&389 OF 10 VSKP 5 CIT VS. MUKUNDRAY K. SHAH REPORTED IN 290 ITR 433 HAVE EXPLAINED AS UNDER: THE COMPANIES HAVING ACCUMULATED PROFITS AND THE COMPANIES IN WHICH SUBSTANTIAL VOTING POWER LIES IN THE HANDS OF THE PERSONS OTHER THAN THE PUBLIC (CONTROLLED COMPANIES) ARE REQUIRED TO DISTRIBUTE ACCUMULATED PROFITS AS DIVIDENDS TO THE SHAREHOLDERS. IN SUCH COMPANIES THE CONTROLLING GROUP CAN DO WHAT IT LIKES WITH THE MANAGEMENT OF THE COMPANY ITS AFFAIRS AND ITS PROFITS. IT IS FOR THIS GROUP TO DECIDE WHETHER THE PROFITS SHOULD BE DISTRIBUTED AS DIVIDENDS OR NOT. THE DECLARATION OF DIVIDEND IS ENTIRELY WITHIN THE DISCRETION OF THIS GROUP. THEREFO RE THE LEGISLATURE REALIZED THAT THOUGH FUNDS WERE AVAILABLE WITH THE COMPANY IN THE FORM OF PROFITS THE CONTROLLING GROUP REFUSED TO DISTRIBUTE ACCUMULATED PROFITS AS DIVIDENDS TO THE SHAREHOLDERS BUT ADOPTED THE DEVICE OF ADVANCING THE SAID PROFITS BY WAY OF LOAN TO ONE OF ITS SHAREHOLDERS SO AS TO AVOID PAYMENT OF TAX ON ACCUMULATED PROFITS. THIS WAS THE MAIN REASON FOR ENACTING SECTION 2(22)(E) OF THE ACT. THE SAME VIEW WAS EXPRESSED BY THE HONBLE SUPREME COURT EARLIER ALSO IN THE CASE OF NAVNIT LAL C. JAVERI VS. K.K. SEN REPORTED IN 56 ITR 198. SECTION 2(22)(E) SHALL HAVE APPLICATION ON FULFILLMENT OF ALL OTHER CONDITIONS IN RELATION TO ANY PAYMENT BY A CLOSELY HELD COMPANY OF ANY SUM BY WAY OF ADVANCE OR LOAN TO - A SHAREHOLDER WHO IS THE B ENEFICIAL 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 10% OF VOTING POWER OR - ANY CONCERN (AS DEFINED IN EXPLANATION 3(A) TO SECTION 2(22)) IN W HICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (AS DEFINED IN EXPLANATION 3(B) TO SECTION 2(22)) . EXPLANATION 3 TO SECTION 2(22) PROVIDES; (A) CONCERN MEANS A HINDU UNDIVIDED FAMILY OR A FIRM OR AN ASSOCIAT ION OF PERSON OR A BODY OF INDIVIDUAL OR A COMPANY (B) A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL INTEREST IN A CONCERN OTHER THAN A COMPANY IF HE IS AT ANY TIME DURING THE PREVIOUS YEAR BIENNIALLY ENTITLED TO NOT LESS THAN 20% OF THE INCOME OF SUCH CONCERN. 4.1 AGAINST THE ABOVE BACKGROUND OF THE LAW RELATING TO TAXABILITY OF DEEMED DIVIDEND IF THE FACTS OF THE CASE OF THE APPELLANT IS EXAMINED THE FOLLOWING UNDISPUTED FACTS EMERGED. ITA NOS.370 371 372 OF 07; 379&389 OF 10 VSKP 6 (I) THAT THE PAPL IS A CLOSELY HELD COMPANY IN WHICH THE APPELLANT IS A SHAREHOLDER CUM DIRECTOR HAVING MORE THAN 10% OF VOTING POWER. (II) THAT AS AT THE END OF THE PREVIOUS YEAR 31/03/1999 RELEVANT TO ASSESSMENT YEAR 1999 - 2000 THOUGH PAPL HAD ACCUMULATED PROFITS OF RS.14 49 652/ - NO DIVIDEND WAS DECLARED A S CLEARLY MENTIONED IN THE DIRECTORS REPORT TO THE SHAREHOLDERS. (III) THAT THE APPELLANT IS A PARTNER IN PA WITH 55% SHARE. THEREFORE PA IS A CONCERN WITHIN THE MEANING OF EXPLANATION 3(A) AND 3(B) TO SECTION 2(22). (IV) THAT AS ON 31.3.1999 AS PER THE ACCOUNT COPY OF PA IN THE BOOKS OF PAPL THE NET DEBIT BALANCE OF PA INCREASED BY RS.12 54 640/ - . 4.2 IN THE ABOVE BACKGROUND OF LAW RELATING TO TAXABILITY OF DEEMED DIVIDENDS AND THE FACTS OF THE APPELLANTS CASE AS ASCERTAINED FROM THE CASE REC ORDS THE ISSUE THAT NEEDS CONSIDERATION IS WHETHER THE SAID DEBIT BALANCE OF RS.12 54 640/ - REPRESENTS EITHER A LOAN OR ADVANCE AS CONTEMPLATED U/S 2(22)(E). LOAN MEANS A LENDING DELIVERY BY ONE PARTY TO AND RECEIVED BY ANOTHER PARTY OF SUM OF MONEYS U PON AGREEMENT EXPRESS OR IMPLIED TO REPAY WITH OR WITHOUT INTEREST. FOR A LOAN THERE MUST BE A LENDER A BORROWER A THING LOANED FOR USE AS WELL AS A CONTRACT BETWEEN THE PARTIES FOR THE RETURN OF THE THING LOANED. A LOAN CONTRACTED NO DOUBT CREATES A DEBT BUT THERE MAY BE A DEBT WITHOUT CONTRACTING A LOAN. IN A LOAN THE MIND AND INTENTION OF THE TWO PARTIES THE LENDER AND THE BORROWER MUST BE AD IDEM. THE EXPRESSION ADVANCE MEANS SOMETHING WHICH IS DUE TO A PERSON BUT WHICH IS PAID TO HIM AHE AD OF TIME WHEN IT IS DUE TO BE PAID. THIS REPRESENTS PAYMENT OF CASH OR THE TRANSFER OF GOODS FOR WHICH ACCOUNTING MUST BE RENDERED BY THE RECIPIENT AT SOME LATTER DATE. IT IS ONLY THE LOAN AND ADVANCES WHICH COULD BE CONSIDERED DEEMED DIVIDEND FOR TH E PURPOSE OF SECTION 2(22)(E). IT IS THEREFORE SINE QUA NON TO ASCERTAIN THE CORRECT NATURE OF THE PAYMENT. IN THE PRESENT CASE THE IMPUGNED DEBIT BALANCE CANNOT BE TERMED AS A LOAN AS PER THE DEFINITION OF LOAN GIVEN AS ABOVE. THERE IS NO EXPRESS O R IMPLIED AGREEMENT TO TREAT THE SAID DEBIT BALANCE AS A LOAN. 4.3 THE NEXT QUESTION THAT NEEDS EXAMINATION IS WHETHER THE IMPUGNED DEBIT BALANCE REPRESENTS AN ADVANCE. AS PER THE APPELLANTS OWN ADMISSION PAPL WAS MAINTAINING A RUNNING ACCOUNT WITH P A. AMOUNTS WERE PAID TO PA FOR REIMBURSEMENT OF EXPENDITURES INCURRED BY PA ON BEHALF OF PAPL. HOWEVER PERUSAL OF THE FACTS OF THAT RUNNING ACCOUNT INDICATE THAT THE PAYMENT BY PAPL WAS ALWAYS MUCH MORE THAN THE EXPENDITURE INCURRED BY PA RESULTING IN A DEBIT BALANCE AT THE END OF THE YEAR. AS PER EXAMPLE FOR THE YEAR ENDING 31/03/1999 I.E. ASSESSMENT YEAR 1999 - 2000 THE OPENING DEBIT ITA NOS.370 371 372 OF 07; 379&389 OF 10 VSKP 7 BALANCE OF PA IN THE BOOKS OF PAPL WAS RS.1 46 76 240/ - AND THE CLOSING DEBIT BALANCE WAS RS.1 60 36 432/ - . IN FACT TH E PAYMENTS MADE BY PA ON BEHALF OF PAPL DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 1999 - 2000 WAS RS.1 92 89 930/ - AND THE PAYMENT RECEIVED BY PA FROM PAPL DURING THAT PERIOD WAS RS.2 06 50 122/ - . AS PER THE DEFINITION OF THE WORD ADVANCE WHICH HAS BEEN INDICATED PARA 4.2 OF THIS ORDER THE SAME IS PAYMENT OF CASH OR TRANSFER OF GOODS FOR WHICH ACCOUNTING MUST BE RENDERED BY THE RECIPIENT AT SOME LATER DATE. THUS KEEPING THE DEFINITION IN VIEW THE IMPUGNED DEBIT BALANCE IS CLEARLY AN ADVANCE . THE APPELLANTS RELIANCE ON THE DECISION OF HONBLE BOMBAY HIGH COURT REPORTED IN 177 ITR 393 (SUPRA) IS TOTALLY OUT OF CONTEXT AND MISPLACED. IN THE SAID CASE IT WAS HELD THAT ADVANCE TOWARDS PURCHASES TO BE MADE BY A COMPANY FROM THE SHAREHOLDER CANN OT BE DEEMED AS DIVIDEND U/S 2(22)(E). IN THE INSTANT CASE NO PURCHASES ARE BEING MADE OR HAD BEEN MADE FROM PA IN WHICH THE DIRECTORS OF PAPL ARE PARTNERS HAVING SUBSTANTIAL INTEREST. THEREFORE THE FACTS OF THE APPELLANTS CASE IS DIFFERENT FROM THE F ACTS OF THE CASE ON THE BASIS OF WHICH HONBLE BOMBAY HIGH COURT HAVE RENDERED THE ABOVE DECISION. FURTHER IT IS NOTICED THAT THE NATURE OF BUSINESS BEING CARRIED ON BY BOTH PAPL AND PA ARE TOTALLY DIFFERENT. THE APPELLANTS ARGUMENT BASED UPON THE DECI SION OF HONBLE ITAT DELHI E - BENCH REPORTED IN 79 ITD 547 (SUPRA) THAT THE DEBIT BALANCES RETAINED WAS MEANT FOR INVESTMENT IN PA AS SHARE CAPITAL AS PA WAS IN THE PROCESS OF TRANSFORMATION FROM A PARTNERSHIP FIRM TO A COMPANY. RELYING UPON THE SAID DE CISION IT WAS ARGUED THAT RECEIPT IN THE NATURE OF SHARE APPLICATION MONEY CANNOT BE CONSTRUED AS A LOAN OR ADVANCE. HOWEVER THIS ARGUMENT OF THE APPELLANT IS NOT BASED UPON ANY VERIFIABLE EVIDENCES. NO DOUBT PA WAS CONVERTED INTO A COMPANY AND WAS INC ORPORATED ON 18 TH AUGUST 2005 BY THE REGISTRAR OF COMPANIES ANDHRA PRADESH. DURING THE PREVIOUS YEAR UNDER CONSIDERATION THERE IS NOTHING ON RECORD THAT THE PROPOSED COMPANY DID IN FACT INVITE SHARE APPLICATION MONEY. THERE WAS NO ALLOTMENT OF SHARES T O PAPL IN THE PREVIOUS YEAR UNDER CONSIDERATION. THEREFORE SHOWING THE SAID AMOUNT AS INVESTMENT IN THE SHARE CAPITAL IN THE ACCOUNTS IS NOTHING BUT A COLOURABLE DEVICE TO ESCAPE FROM TAXATION. HENCE IT IS CONCLUDED THAT THE SAID AMOUNT REPRESENTS AN ADVANCE. 4.4 IN VIEW OF THE DISCUSSION MADE AS ABOVE THE AMOUNT OF RS.12 54 640/ - REPRESENTS A DEEMED DIVIDEND WITHIN THE MEANING OF SECTION 2(22)(E) OF THE ACT AND THE ASSESSING OFFICER IS JUSTIFIED IN TREATING THE SAME AS SUCH. THE ASSESSING OFFICER IS ALSO CORRECT IN TAKING 55% OF THE SAME REPRESENTING THE SHARE OF THE APPELLANT IN THE FIRM PA AS THE INCOME OF THE APPELLANT. HENCE THE ORDER OF THE ASSESSING OFFICER IS HEREBY ` CONFIRMED AND THE APPEAL IS ` DISMISSED. 8 . AGGRIEVED THE ASSESSEE HA S PREFERRED AN APPEAL BEFORE THE TRIBUNAL AND REITERATED ITS CONTENTIONS. THE LD. COUNSEL FOR THE ASSESSEE HAS ALSO INVITED OUR ATTENTION TO THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT WITH THE ITA NOS.370 371 372 OF 07; 379&389 OF 10 VSKP 8 SUBMISSIONS THAT THE PAYMENT WAS MADE BY THE COMPANY TO THE FIRM. THEREFORE THE FIRM IS BENEFITED BY THE ADVANCES GIVEN BY THE COMPANY. AS SUCH IF THE ADVANCES GIVEN BY THE COMPANY IS TO BE TREATED AS A DEEMED DIVIDEND IT SHOULD BE TAXED IN THE HANDS OF THE FIRM AND NOT THE INDIVIDUALS WHO HAVE THE SHARE HOLDI NGS IN THE COMPANY AS WELL AS THE FIRM. 9 . THE LD. COUNSEL FOR THE ASSESSEES FURTHER CONTENTED THAT ULTIMATELY WHATEVER ADVANCES WERE GIVEN WERE CONVERTED INTO THE SHARE CAPITAL OF THE COMPANY IN THE HANDS OF THE FIRM WHICH WAS CONVERTED INTO A COMPANY A ND CORRESPONDING SHARES WERE ALLOTTED TO PAPL. THEREFORE THE ADVANCES GIVEN BY THE PAPL TO PA SHOULD NOT BE TREATED EITHER AS AN ADVANCE OR LOAN AND THE DEEMED PROVISION CANNOT BE ATTRACTED. HE HAS ALSO PLACED A RELIANCE UPON THE CIRCULAR NO.495 DATED 2 0.9.1987 ISSUED BY THE CBDT IN SUPPORT OF HIS CONTENTION THAT WORD CONCERN USED IN NEWLY INSERTED EXPLANATION 3(A) TO SECTION 2(22) OF THE ACT MEANS A HUF OR A FIRM OR AN ASSOCIATION OF PERSONS OR A BODY OF INDIVIDUALS OR A COMPANY. THEREFORE BY OBTAIN ING A LOAN OR THE ADVANCE BY THE CONCERN FROM THE COMPANY THE CONCERN IS THE BENEFICIARY AND THE DEEMED DIVIDEND CAN ONLY BE ASSESSED IN THE HANDS OF THE CONCERN AND IN THE INSTANT CASE IT IS A FIRM PA WHO GOT THE LOAN/ADVANCE AND BENEFITED BY THAT AND NOT THE PARTNER . HE HAS PLACED A RELIANCE UPON THE JUDGEMENT OF THE TRIBUNAL IN THE CASE OF M.B. STOCK HOLDING PVT. LTD. VS. ACIT 84 ITD 542. 10 . THE LD. D.R. ON THE OTHER HAND HAS SUBMITTED THAT CONVERSION OF THE PARTNERSHIP FIRM INTO A COMPANY WAS EFFECT ED DURING FEBRUARY 2005 RELEVANT TO THE ASSESSMENT 2005 - 06. WHEREAS THE ASSESSMENT YEARS INVOLVED ARE 1999 - 2000. THEREFORE THE SUBSEQUENT EVENTS TOOK PLACE AFTER 4/5 YEARS CANNOT BE THE GOVERNING FACTOR TO DECIDE THE NATURE OF ADVANCES OR LOAN GIVEN T O THE FIRM. THE LD. D.R. HAS ALSO PLACED A HEAVY RELIANCE UPON THE ORDER OF THE SPECIAL BENCH IN THE CASE OF ACIT VS. BH AU MIK COLOUR (P) LTD. 118 ITD 1 IN WHICH THE SPECIAL BENCH HAS CATEGORICALLY HELD THAT DIVIDEND INCOME CAN BE ASSESSED ONLY IN THE HAND S OF A PERSON WHO IS SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF THE BORROWING CONCERN IN WHICH SUCH SHARE HOLDER IS A MEMBER OR A PARTNER HAVING SUBSTANTIAL INTEREST. ITA NOS.370 371 372 OF 07; 379&389 OF 10 VSKP 9 MEANING THEREBY THE DIVIDEND INCOME CAN ONLY BE ASSESSED IN THE HANDS OF THE SHARE HOLDER . A T THE MOST CORRESPONDING TO THE INTEREST IN THE BORROWING CONCERN. THEREFORE THE A.O. HAS DECIDED THE ISSUE AS PER THE RATIO LAID DOWN BY THE SPECIAL BENCH IN THE ABOVE SAID CASE. THE LD. D.R. FURTHER COMMENTED UPON THE CIRCULAR ISS UED BY THE CBDT WITH THE SUBMISSION THAT IN THE CIRCULAR NOWHERE IT HAS BEEN SAID THAT THE DIVIDEND INCOME IS TO BE TAXED IN THE HANDS OF THE CONCERN ONLY. SINCE THE ISSUE IS SQUARELY COVERED BY THE ORDER OF THE SPECIAL BENCH THE ORDER OF THE CIT(A) DESE RVE TO BE CONFIRMED. 1 1 . HAVING HEARD THE RIVAL SUBMISSIONS AND FROM A CAREFUL PERUSAL OF THE RECORD AND THE RELEVANT PROVISIONS OF THE ACT AND CIRCULAR WE FIND THE PROVISIONS OF THE ACT ARE TOTALLY SILENT IN WHOSE HANDS THE DIVIDEND IS TO BE TAXED. FOR THE SAKE OF REFERENCE WE EXTRACT THE CLAUSE (E) OF SUB SECTION 2(22)(E) AS UNDER: 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 REPRES ENTING 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 SHARE HOLDER 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 ; BUT DIVIDEND DOES NOT INCLUDE - (II) AN Y ADVANCE OR LOAN MADE TO A SHAREHOLDER (OR THE SAID CONCERN) BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS WHERE THE LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY. 1 2 . FROM A BEAR PERUSAL OF CLAUSE (E) WE FIND THAT THE L EGISLATURE HAS SIMPLY MADE IT CLEAR THAT ONCE THE COMPANY GIVES ANY ADVANCE OR LOAN TO A SHARE HOLDER BEING A PERSON WHO IS THE BENEFICIAL OWNER OF THE SHARES NOT ITA NOS.370 371 372 OF 07; 379&389 OF 10 VSKP 10 BEING SHARES ENTITLED TO FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPA TE IN PROFITS HOLDING NOT LESS THAN 10% OF THE POWER OR TO ANY CONCERN IN WHICH SUCH SHARE HOLDER IS A MEMBER OR A PARTNER IN WHICH HE HAS SUBSTANTIAL INTEREST OR ANY PAYMENT BY SUCH COMPANY ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF ANY SHARE HOLDER TO T HE EXTENT TO WHICH COMPANY IN EITHER CASE POSSESS ACCUMULATED PROFIT. MEANING THEREBY IT HAS NOT BEEN MADE SPECIFICALLY CLEAR IN THE PROVISION IN WHOSE HANDS THE ADVANCES GIVEN TO THE CONCERN IS TO BE ASSESSED AS DEEMED DIVIDEND. WHETHER IT SHOULD BE IN THE HANDS OF THE CONCERN OR THE SHARE HOLDER OR THE PARTNER WHO HAS INTEREST IN BOTH THE COMPANIES AND THE CONCERN. THIS ISSUE CAME UP BEFORE THE TRIBUNAL FOR ADJUDICATION AND THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. BHAUMIK COLOURS (P) LTD. (SUPRA) HAS CATEGORICALLY HELD THAT THE DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO IS A SHARE HOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF THE BORROWING CONCERN IN WHICH SUCH SHARE HOLDER IS A MEMBER OR A PARTNER HAVING SUBSTANTIAL INTEREST. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE EXTRACTED HEREUNDER: DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER. THE PROVISIONS OF S. 2(22)(E) DO NOT SPELL OUT AS TO WHETHER THE INCOME HAS TO BE TAXED IN THE HANDS OF THE SHAREHOLDER OR THE CONCERN (NON - SHAREHOLDER). THE PROVISIONS ARE AMBIGUOUS. IT IS THEREFORE NECESSARY TO EXAMINE THE INTENTION BEHIND ENACTING TH E PROVISIONS OF S. 2(22)(E). THE INTENTION BEHIND ENACTING PROVISIONS OF S. 2(22)(E) IS THAT CLOSELY HELD COMPANIES (I.E. COMPANIES IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED) WHICH ARE CONTROLLED BY A GROUP OF MEMBERS EVEN THOUGH THE COMPANY HAS ACCUMULATED PROFITS WOULD NOT DISTRIBUTE SUCH PROFIT AS DIVIDEND BECAUSE IF SO DISTRIBUTED THE DIVIDEND INCOME WOULD BECOME TAXABLE IN THE HANDS OF THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED PROFITS AS DIVIDEND COMPANIES DISTRIBUTE THEM AS LO AN OR ADVANCES TO SHAREHOLDERS OR TO CONCERN IN WHICH SUCH SHAREHOLDERS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER. IN SUCH AN EVENT BY THE DEEMING PROVISIONS SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF S. 2(22)(E) IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDER. THE DEEMING PROVISION AS IT APPLIES TO THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTAN TIAL INTEREST IS BASED ON THE PRESUMPTION THAT THE LOAN OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN ITA NOS.370 371 372 OF 07; 379&389 OF 10 VSKP 11 OR ADVANCE. THE INTENTION OF THE LEGISLATURE IS THEREFORE TO TAX DIVIDEND ONLY IN THE HANDS OF THE SH AREHOLDER AND NOT IN THE HANDS OF THE CONCERN. THE BASIS OF BRINGING IN THE AMENDMENT TO S. 2(22)(E) BY THE FINANCE ACT 1987 W.E.F. 1 ST APRIL 1988 IS TO ENSURE THAT PERSONS WHO CONTROL THE AFFAIRS OF A COMPANY AS WELL AS THAT OF A FIRM CAN HAVE THE PAY MENT MADE TO A CONCERN FROM THE COMPANY AND THE PERSON WHO CAN CONTROL THE AFFAIRS OF THE CONCERN CAN DRAW THE SAME FROM THE CONCERN INSTEAD OF THE COMPANY DIRECTLY MAKING PAYMENT TO THE SHAREHOLDER AS DIVIDEND. THE SOURCE OF POWER TO CONTROL THE AFFAIRS OF THE COMPANY AND THE CONCERN IS THE BASIS ON WHICH THESE PROVISIONS HAVE BEEN MADE. IT IS THEREFORE PROPER TO CONSTRUE THOSE PROVISIONS AS CONTEMPLATING A CHARGE TO TAX IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF A NON - SHAREHOLDER VIZ. CONC ERN. A LOAN OR ADVANCE RECEIVED BY A CONCERN IS NOT IN THE NATURE OF INCOME. IN OTHER WORDS THERE IS A DEEMED ACCRUAL OF INCOME EVEN UNDER S. 5(1)(B) IN THE HANDS OF THE SHAREHOLDER ONLY AND NOT IN THE HANDS OF THE PAYEE VIZ. NON - SHAREHOLDER (CONCERN). SEC.5(1)(A) CONTEMPLATES THAT THE RECEIPT OR DEEMED RECEIPT SHOULD BE IN THE NATURE OF INCOME. THEREFORE THE DEEMING FICTION CAN BE APPLIED ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT THE NON - SHAREHOLDER VIZ. THE CONCERN. CBDT CIRCULAR NO.495 DATED 2 2 ND SEPT. 1987 TO THE EXTENT NOT BENEVOLENT IS NOT BINDING. IN THE EVENT OF THE PAYMENT OF LOAN OR ADVANCE BY A COMPANY TO A CONCERN BEING TREATED AS DIVIDEND AND TAXED IN THE HANDS OF THE CONCERN THEN THE BENEFIT OF SET OFF AS PER S. 2(22)(E)(III) CAN NOT BE ALLOWED TO THE CONCERN BECAUSE THE CONCERN CAN NEVER RECEIVE DIVIDEND FROM THE COMPANY WHICH IS ONLY PAID TO THE SHAREHOLDER WHO HAS SUBSTANTIAL INTEREST IN THE CONCERN. THE PROVISIONS OF SUB - CL. (III) OF S. 2(22)(E) ALSO THEREFORE CONTEMPLATE DE EMED DIVIDEND BEING TAXED IN THE HANDS OF A SHAREHOLDER ONLY. 1 3 . SINCE THE IDENTICAL ISSUE HAS BEEN EXAMINED BY THE SPECIAL BENCH WE BEING THE SMALLER BENCH ARE BOUND BY THE VIEW TAKEN BY THE SPECIAL BENCH. WE THEREFORE FOLLOWING THE VIEW OF THE SPECI AL BENCH HOLD THAT THE LOAN OR ADVANCES GIVEN TO THE FIRM ARE TO BE TREATED AS A DEEMED DIVIDEND IN THE HANDS OF THE SHARE HOLDER. THEREFORE THE CIT(A) HAS CORRECTLY ADJUDICATED THE ISSUE AND WE FIND NO INFIRMITY THEREIN. ACCORDINGLY WE CONFIRM HIS ORD ER. IN OTHER APPEALS THE IDENTICAL ISSUE WAS THERE EXCEPT THE DIFFERENCE IN QUANTUM. THEREFORE FOLLOWING THE AFORESAID VIEW WE DISPOSE OF ALL APPEALS AND CONFIRM THE ORDER OF THE CIT(A) IN THIS REGARD. 1 4 . IN ITA NOS.379 & 380 OF 2010 ONE MORE GROUN D IS ALSO RAISED WITH REGARD TO THE CHARGEABILITY OF INTEREST U/S 234B AND 234C OF THE I.T. ACT. THIS GROUND WAS ADJUDICATED BY THE CIT(A) IN THE LIGHT OF THE ORDER OF THE SPECIAL ITA NOS.370 371 372 OF 07; 379&389 OF 10 VSKP 12 BENCH IN THE CASE OF MOTOROLA INC USA VS. DCIT 95 ITD 269 IN WHICH THE TRIB UNAL HAS CATEGORICALLY HELD THAT INTEREST U/S 234A 234B & 234C IS MANDATORY IN THE SENSE THAT IT CANNOT BE WAIVED OR REDUCED BY THE I.T. AUTHORITIES. SINCE THE CIT(A) HAS ADJUDICATED THE ISSUE IN THE LIGHT OF THE ORDER OF THE SPECIAL BENCH WE FIND NO IN FIRMITY IN HIS ORDER. ACCORDINGLY WE CONFIRM THE SAME. 1 5 . IN THE RESULT THE APPEALS OF THE ASSESSEE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 25.1 .20 1 1 SD/ - SD/ - (BR BASKARAN) (SUNIL KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER VG/SPS VISAKHAPATNAM DATED 25 TH JANUARY 20 1 1 COPY TO 1 M/S. G.R. KUMAR & CO. CHARTERED ACCOUNTANTS 9 MERRYLIFE APARTMENTS PEDA WALTAIR VISAKHAPATNAM - 530 017. 2 SRI GANTA SRINIVASA RAO PLOT NO.231 SEC TOR - 4 MVP COLONY VISAKHAPATNAM 3 ACIT CIRCLE - 1(1) VISAKHAPATNAM 4 ACIT CIRCLE - 4(1) VISAKHAPATNAM 5 THE CI T VISAKHAPATNAM 6 THE CIT (A) VISAKHAPATNAM 7 THE DR ITAT VISAKHAPATNAM. 8 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM