ITO 8(1)(2), MUMBAI v. SHAILESH D. SHAH, MUMBAI

ITA 7126/MUM/2013 | 2010-2011
Pronouncement Date: 26-10-2016

Appeal Details

RSA Number 712619914 RSA 2013
Assessee PAN AAEPS1552K
Bench Mumbai
Appeal Number ITA 7126/MUM/2013
Duration Of Justice 2 year(s) 10 month(s) 21 day(s)
Appellant ITO 8(1)(2), MUMBAI
Respondent SHAILESH D. SHAH, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 26-10-2016
Appeal Filed By Department
Bench Allotted E
Tribunal Order Date 26-10-2016
Assessment Year 2010-2011
Appeal Filed On 05-12-2013
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH MUMBAI BEFORE SHRI B.R. BASKARAN (AM) & RAMLAL NEGI (JM) I.T.A. NO. 7126 /MUM/20 13 (ASSESSMENT YEAR 20 10 - 11 ) ITO - 8(1)(2) ROOM NO. 205 2 ND FLOOR AAYAKAR BHAVAN M.K. ROAD MUMBAI - 400 020. VS. SHRI SHAILESH D. SHAH DAMODAR BUILDING 105 PRINCESS STREET MUMBAI - 400 002. ( APPELLANT ) ( RESPONDENT ) PAN NO . AAEPS1552K ASSESSEE BY SHRI JITENDRA MOTWANI DEPARTMENT BY S HRI A.K. KARDAM DATE OF HEARING 20 .10 . 201 6 DATE OF PRONOUNCEMENT 20 . 10 . 201 6 O R D E R PER B.R. BASKARAN (AM) : - THE REVENUE HAS FILED THIS APPEAL CHALLENGING THE ORDER DATED 26 - 09 - 2013 PASSED BY LD CIT(A) - 1 MUMBAI FOR ASSESSMENT YEAR 2010 - 11. THE REVENUE IS AGGRIEVED BY THE DECISION OF LD CIT(A) IN HOLDING THAT THE BONUS SHARES RE CEIVED BY THE ASSESSEE WILL NOT BE LIABLE TO TAXATION U/S 2(22)(A) OF THE ACT AS DEEMED DIVIDEND. 2. WE HEARD THE PARTIES AND PERUSED THE RECORD. THE ASSESSEE IS A DIRECTOR IN M/S CORAL COSMETICS LTD HAVING 98% SHAREHOLDING WITH VOTING RIGHTS. HE RECEIVED BONUS SHARES FOR A VALUE OF RS.4.93 CRORES. THE ASSESSING OFFICER ASSESSED THE SAME AS DEEMED DIVIDEND U/S 2(22)(A) OF THE ACT. THE LD CIT(A) DELETED THE SAME HOLDING THAT THE ISSUING OF BONUS SHARES DOES NOT ENTAIL RELEASE OF ASSETS OF THE COMP ANY AND HENCE THE AO WAS NOT JUSTIFIED IN SHRI SHAILESH D. SHAH 2 ASSESSING THE BONUS SHARES AS DEEMED DIVIDEND U/S 2(22)(A) OF THE ACT. THE REVENUE IS AGGRIEVED BY THE SAID DECISION OF LD CIT(A). 3. SECTION 2(22)(A) READS AS UNDER: - DIVIDEND INCLUDES (A) ANY DISTRIBUTION B Y A COMPANY OF ACCUMULATED PROFITS WHETHER CAPITALISED OR NOT IF SUCH DISTRIBUTION ENTAILS THE RELEASE BY THE COMPANY TO ITS SHAREHOLDERS OF ALL OR ANY PART OF THE ASSETS OF THE COMPANY.... WE NOTICE THAT IN ORDER TO ATTRACT THE PROVISIONS OF SEC. 2(22) (A) FOLLOWING TWO CONDITIONS SHOULD BE CUMULATIVELY SATISFIED VIZ. (I) A COMPANY SHOULD DISTRIBUTE OUT OF ACCUMULATED PROFITS WHETHER CAPITALISED OR NOT (II) IT SHOULD ENTAIL RELEASE BY COMPANY TO ITS SHAREHOLDERS OF ALL OR ANY PART OF THE ASSETS OF THE COMPANY . 4. WE NOTICE THAT THE AUTHORITY FOR ADVANCE RULINGS HAS CONSIDERED AN IDENTICAL ISSUE IN THE CASE OF BRIGGS OF BURTON (INDIA) (P) LTD (274 ITR 595) AND THE AAR HAS HELD THAT WHEN A COMPANY ISSUES BONUS REDEEMABLE PREFERENCE SHARES TO EXISTING EQUITY S HAREHOLDERS NO INCOME WOULD ACCRUE TO NON - RESIDENT EQUITY SHAREHOLDERS BEING ALLOTTEES AND THEREFORE COMPANY IS NOT REQUIRED TO DEDUCT TAX AT SOURCE AND FURTHER DISTRIBUTION OF ACCUMULATED PROFITS THROUGH ISSUE OF BONUS REDEEMABLE PREFERENCE SHARES TO E XISTING EQUITY SHAREHOLDERS WOULD NOT BRING IT WITHIN MISCHIEF OF SECTION 2(22). THE RELEVANT DISCUSSIONS MADE BY AAR ARE EXTRACTED BELOW: - 5. FROM A CAREFUL CONSIDERATION OF THE (DEFINITION OF DIVIDEND GIVEN IN THE IT ACT ) IT IS CLEAR THAT DISTRIBUTION OF ACCUMULATED PROFITS BY THE COMPANY THROUGH ISSUE OF BONUS REDEEMABLE PREFERENCE SHARES TO THE EXISTING EQUITY SHAREHOLDERS WOULD NOT BRING IT WITHIN THE MISCHIEF OF SECTION 2(22) OF THE IT ACT 1961. THE RELEVANT PROVISIONS ARE AS UNDER : '2(22) DIVIDEND INCLUDES -- SHRI SHAILESH D. SHAH 3 (A) ANY DISTRIBUTION BY A COMPANY OF ACCUMULATED PROFITS WHETHER CAPITALIZED OR NOT IF SUCH DISTRIBUTION ENTAILS THE RELEASE BY THE COMPAN Y TO ITS SHAREHOLDERS OF ALL OR ANY PART OF THE ASSETS OF THE COMPANY; (B) ANY DISTRIBUTION TO ITS SHAREHOLDERS BY A COMPANY OF DEBENTURES DEBENTURE - STOCK OR DEPOSIT CERTIFICATES IN ANY FORM WHETHER WITH OR WITHOUT INTEREST AND ANY DISTRIBUTION TO ITS P REFERENCE SHAREHOLDERS OF SHARES BY WAY OF BONUS TO THE EXTENT TO WHICH THE COMPANY POSSESSES ACCUMULATED PROFITS WHETHER CAPITALIZED OR NOT' FROM A READING OF THE SUB - CLAUSE (A) IT WILL BE CLEAR THAT NOT ONLY THERE HAS TO BE A DISTRIBUTION BY THE COMPA NY OF ACCUMULATED PROFITS BUT SUCH DISTRIBUTION MUST ENTAIL THE RELEASE OF ASSETS BY THE COMPANY TO THE SHAREHOLDERS. THIS ISSUE HAS BEEN DEALT WITH IN A NUMBER OF JUDICIAL PRONOUNCEMENTS AND THE FOLLOWING PASSAGES FROM THE DECISION OF HON'BLE GUJARAT HI GH COURT IN THE CASE OF SASHIBALA NAVNITLAL V. CIT (1964) 54 ITR 478 (GUJ) LUCIDLY EXPLAINS THE LEGAL POSITION : 'AS OBSERVED BY HIDAYATULLAH J. IN CIT V. DALMIA INVESTMENT CO. LTD . (1964) 52 ITR 567 (SC) A FTER THE ACCUMULATED PROFITS ARE CONVERTED INTO CAPITAL AND BONUS SHARES ARE ISSUED CREDITED AS FULLY PAID UP 'THE COMPANY EMPLOYS THAT MONEY NOT AS RESERVES OF PROFIT BUT AS ITS PROPER CAPITAL ISSUED TO AND CONTRIBUTED BY THE SHAREHOLDER'. IF THIS BE THE CORRECT LEGAL ANALYSIS OF WHAT HAPPENS WHEN BONUS SHARES ARE ISSUED BY A COMPANY IT IS CLEAR THAT AT THAT STAGE THERE IS A DISTRIBUTION OF CAPITALIZED ACCUMULATED PROFITS THOUGH THAT DISTRIBUTION DOES NOT TAKE THE FORM OF PAYMENT OF ACCUMULATED PROFITS IN CASH TO THE SHAREHOLDERS AND DOES NOT THEREFORE ENTAIL RELEASE OF ANY ASSETS OF THE COMPANY SO AS TO FALL WITHIN SECTION 2(6A)(A) [OF THE 1922 ACT). THIS VIEW WHICH WE ARE TAKING IS AMPLY SUPPORTED BY AUTHORITIES BUT MORE THAN THE AUTHORITIES THERE IS A STATUTORY ENACTMENT WHICH CLEARLY SHOWS THAT WHEN BONUS SHARES ARE ISSUED CREDITED AS FULLY PAID UP OUT OF CAPITALIZED ACCUMULATED PROFITS THERE IS DISTRIBUTION OF CAPITALIZED ACCUMULATED PROFITS THO UGH SUCH DISTRIBUTION DOES NOT ENTAIL RELEASE OF ASSETS OF THE COMPANY.' THE ABOVE VIEW OF THE HON'BLE GUJARAT HIGH COURT IS BASED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT V. DALMIA INVESTM ENT CO. LTD (SUPRA). IT HAS BEEN HELD BY THE HON'BLE APEX COURT AS UNDER : 'A DIVIDEND IN THE STRICT SENSE MEANS A SHARE IN THE PROFITS AND A SHARE IN THE PROFITS CAN ONLY BE SAID TO BE PAID TO THE SHAREHOLDER WHEN A PART OF THE PROFITS IS RELEASED TO HIM IN CASH AND THE COMPANY PAYS THAT AMOUNT AND THE SHAREHOLDER TAKES IT AWAY. THE CONVERSION OF THE RESERVES INTO CAPITAL DOES NOT INVOLVE THE RELEASE OF THE PROFITS TO THE SHAREHOLDER; THE MONEY REMAINS WHERE IT WAS THAT IS TO SAY EMPLOYED IN THE BUSINES S. THEREAFTER THE COMPANY EMPLOYS THAT MONEY NOT AS RESERVES OF PROFITS BUT AS ITS PROPER CAPITAL ISSUED TO AND CONTRIBUTED BY THE SHAREHOLDER.' SHRI SHAILESH D. SHAH 4 ' THE INDIAN IT ACT DEFINES 'DIVIDEND' AND ALSO EXTENDS IT I N SOME DIRECTIONS BUT NOT SO AS TO MAKE THE ISSUE OF BONUS SHARES A RELEASE OF RESERVES AS PROFITS SO THAT THEY COULD BE INCLUDED IN THE TERM.' THE ABOVE INTERPRETATION IS FURTHER CLARIFIED BY READING OF 2(22)(B) [FOR WHICH THERE IS NO CORRESPONDING PROVIS ION IN THE 1922 ACT] IN WHICH THE WORDS 'IF SUCH DISTRIBUTION ENTAILS THE RELEASE BY THE COMPANY TO ITS SHAREHOLDERS OF ALL OR ANY PART OF THE ASSETS OF THE COMPANY' ARE OMITTED. IN OTHER WORDS DISTRIBUTION OF ACCUMULATED PROFIT BY WAY OF ISSUE OF BONUS SHARES TO PREFERENCE SHAREHOLDERS OF THE COMPANY WILL HAVE TO BE TREATED AS DEEMED DIVIDEND AT THE TIME OF ISSUE ITSELF. IT NECESSARILY FOLLOWS THAT THE LEGISLATIVE INTENT IS THAT ISSUE OF BONUS PREFERENCE SHARES TO EQUITY SHAREHOLDERS SHOULD NOT BE TREAT ED AS DEEMED DIVIDEND AT THE TIME OF ISSUE BUT ONLY WHEN IT CAN BE SAID THAT THERE IS A RELEASE OF ASSETS OF THE COMPANY TO THE SHAREHOLDER WITHIN THE MEANING OF SUB - CLAUSE (A). FOR THE ABOVE MENTIONED REASONS WE RULE AS FOLLOWS : 'WHEN THE APPLICANT ALL OTS BONUS REDEEMABLE PREFERENCE SHARES TO THE EXISTING EQUITY SHAREHOLDERS NO INCOME WOULD ACCRUE TO THE NON - RESIDENT EQUITY SHAREHOLDERS BEING THE ALLOTTEES AND THEREFORE THE COMPANY IS NOT REQUIRED TO DEDUCT TAX AT SOURCE AT THIS STAGE.' 5. SINCE TH E ISSUE OF BONUS SHARES TO THE ASSESSEE DOES NOT ENTAIL RELEASE OF ALL OR ANY PART OF ASSETS OF THE COMPANY TO ITS SHAREHOLDERS THE SAME WOULD NOT FALL WITHIN THE MISCHIEF OF SEC. 2(22)(A) OF THE ACT. ACCORDINGLY WE ARE OF THE VIEW THAT THE LD CIT(A) WAS JUSTIFIED IN CANCELLING THE ADDITION MADE BY THE AO U/S 2(22)(A) OF THE ACT. 6. IN THE RESULT THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER HAS BE EN PRONOUNCED IN THE COURT ON 20 . 10 .2016 SD/ - SD/ - (RAMLAL NEGI ) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 20 / 10 / 20 1 6 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT 5. DR ITA T MUMBAI SHRI SHAILESH D. SHAH 5 6. GUARD FILE. BY ORDER //TRUE COPY// ( DY./ASSTT. REGISTRAR) PS ITAT MUMBAI