PRINCIPAL COMMISSIONER OF INCOME TAX vs. RAM SHIPPING INDUSTRIES PVT LTD

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) [1.0] Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Income Tax Appellate Tribunal, Mumbai Bench ‘E’, Mumbai (hereinafter referred to as the “Tribunal”) dated 14/10/2014 in ITA No.399/Mum/2013 for the Assessment Year 2009-10, the revenue has preferred the present Tax Appeal to consider the following substantial question of law; “Whether the Appellate Tribunal has substantially erred in deleting the addition on the ground that assessee company is not a registered share holder of the lender company, when the definition of deemed dividend under Section 2(22)(e) clearly includes registered as well as beneficial shareholders?” [2.0] The assessee who was dealing in the ship breaking activity filed the return of income for the Assessment Year 2009-10 declaring the total income at Rs.1,50,59,920/-. The return of income was duly processed under Section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) on 02/08/2010 and the case was selected for scrutiny and notice under Section 143(2) of the Act was issued and served upon the assessee. During the course of the assessment proceedings the Assessing Officer noticed that the assessee- Company had obtained loan of Rs.7,93,30,000/- from one of its group Company i.e. M/s. Shree Ram Vessel Scrap Pvt. Ltd.. The Assessing Officer asked the assessee to submit the balance sheet, Profit & Loss and shareholding pattern of the said Company. The assessee submitted the details as called for by the Assessing Officer. On perusal of the details subitted by the assessee, the Assessing Officer observed that the assessee-Company and M/s. Shree Ram Vessel Scrap Pvt. Ltd. had common shareholding pattern as below; Sr. No. Name of the shareholder No. of shares & % share in M/s. Shree Ram Vessel Scrap Pvt. Ltd. No. of shares & % share in M/s. Shree Ram Vessel Scrap Pvt. Ltd. 1 Ranjanben Mukeshbhai Patel 4,95,000 shares 44.2% 5,00,000 shares 2 Mukeshbhai Balabhai Patel (AAPPP8456N) 1,25,000 shares 11.16% 15,62,500 shares 52% [2.1] On perusal of the said chart, the Assessing Officer observed that Shri Mukeshbhai Balabhai Patel and Ms. Ranjanben M. Patel had substantial interest i.e. more than 10% shareholding” in the assessee-Company and also holds more than 10% shares in M/s. Shree Ram Vessel Scrap Pvt. Ltd. Since the common shareholders were having substantial interest, the Assessing Officer invoked the provision of Section 2(22)(e) of the Act and required the assessee to explain as to why the loan obtained by the assessee-Company from M/s. Shree Ram Vessel Scrap Pvt. Ltd. should not be considered to be taxed as deemed dividend. In reply it was submitted that the assessee-Company is not a registered shareholder and, therefore, the amount obtained by the assessee from M/s. Shree Ram Vessel Scrap Pvt. Ltd could not be treated as deemed dividend, however, the Assessing Officer did not accept the said submission of the assessee and added a sum of Rs.4,14,71,946/-, which represented the amount shown as reserved and surplus in the books of M/s. Shree Ram Vessel Scrap Pvt. Ltd. [2.2] Feeling aggrieved and dissatisfied with the aforesaid addition made by the Assessing Officer invoking the provisions of Section 2(22)(e) of the Act, the assessee preferred appeal before the learned CIT(A) and the learned CIT(A) dismissed the said appeal and confirmed the addition made by the Assessing Officer. [2.3] Pvt. Ltd and Ors. in ITA No.114/2012 and the decision of the [2.4] Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Tribunal, the revenue has preferred the present Tax Appeal with the aforesaid proposed substantial question of law. [3.0]

We have heard Shri Manish Bhatt, learned Counsel appearing on behalf of the revenue at length. We have also considered and gone through the impugned judgment and order passed by the learned Tribunal; the assessment order as well as the order passed by the learned CIT(A) making the addition of Rs.4,14,71,946/- made by the Assessing Officer invoking Section 2(22)(e) of the Act. In paras 24 to 27, the Delhi High Court in the case of Ankitech Pvt. Ltd.(Supra) has held and observed as under; “24. The intention behind enacting the provisions of Section 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 loan 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 Section 2(22)(e) of the Act is to tax dividend in the hands of shareholders. The deeming provisions as it applies to the case of loans or advances by a Company to a concern in which its shareholder has substantial interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the Company giving the loan or advance.