CIT vs. NATIONAL TRAVEL SERVICES

% V IIV ITA 219 OF 2010 ITA 219 OF 2010 ITA'1204'OF 2010 1TA"3d9pF-20il ... n n n! , : ILidament Reserved on: 24.5.2011 ludament delivered on: 11.07.2011 COMMISSIONER OF INCOME TAX . . . APPELLANT / - ^ ^ ; Through;^ Ms.:Prem Lata Bansal, Sn r AdvoGate with Mr/Ruchir Bhatia, '■■ .V; "Advocat0.^..■;' Mr. Kirah Babu, Advocate v;' / M : ■ Standing Counsei. '/ ; : '-versus' , , M/S NATIONAL TRAVEL SERVICES , . RESPONDENT ^ y Through; JMr. M.S. Syali, Sr. Advocate with - Mr. ; U-A- , Rana, Mr. Mrinal ; ; , ■ : : Mazuhidar and M ' y- T Advocates; - y-' '; 121 ITA 1204 OF 2010 COMMISSIONER QF INCOME TAX ■ ■ i APPELLANT through: Ms. Prem Lata Bansai, Sr. : Advocate: with M y- ■ Advocate.-;:; -t-: ' ; Mr. Kiran Babu, Advocate t ■ y; ■ Mr. Kamai Sawhney, Sr. Standing Counsei. , ^ tyC:- - -'. - yy-'; M/S NATIONAL TRAVEL SERVICES , . .RESPONPENT ; ; Through: Mr. M.S. Syali,jSr; Advocate with y ; v ; t/lr. ; U.A: : Rana^^ Mr; : Mrinal Mazumdar and Ms. Husnai Syali Advocates. ; 2011:DHC:14828-DB

f3VITA 309 OF COMMISSIONER OF INCOME TAX - APPELLANT V ; Through: Ms. Prem Lata Bansal, Sr. n Cr. n ; ; Advocate with Mr. Ruchir Bhatia, ./-v'"' '■'^^;Advocate;> — ; ; y M Babij, Advocatd :y^y >; ' ; , ; y ^ Sr. yv y: : ; ; y - y, ^ ; o ; ';Stahdiri^ Counselv^ ^ ' VERSUS . . .respondent through; ■ MryM.S7Syali, Sr. Advocate with ■ Mr: U:A;v Rana,;; Mr, Mrinal Mazunridar and Ms. Husnai Syali V 'Vv'7; v ' ^ vAdyocates^- . 7 ^y-v7-:7^ ' ."■y- 7: "" -- CORAM:-^ 77 " ' HON'BLE MR. JUSTICE A-K- SIKRI HON'BLE MR. JUSTICE M.L. MEHTA V , 1. Whether Reporters of Local newspapers nriay be 7 :7 ' allowed to see the Judgment? . y : ; , :y 2.; to be referred to the Reporter or not? i 7^7 7 3. Whether the Judgndeht/should; be reported :in the ■■7'r. - 7 ; ' Digest? 7y:;7:77.77:7:;7;ry7'r7-^:'^''7' 7. ■■77.;7:-7 77;7:-77- A.K. SIKRI, I. 1; For ordersrsee ITA 223 of 2010.7; 7 V (A.K. SIKRI) JUDGE JULY il, 2011 skb ; ■ - ■ r. • ■ (M.L. MEHTA) JUDGE 2011:DHC:14828-DB

:.m'223-OF.2O10 ;MtA 2:l^ OF^ZOIO'' _ n :im i204;OF ^OlO • . .■ 30^■•0)F-2P11 ■% r/ . ludqment Reserved on: '24.5.20li ludqrrient delivered on: 11.07!2C)11 (1) tTA No,22a off 2010 ■;/ , : COMMISSIOMEK OF INCOME TAX. " :'. >. Throqgh: 'Ms. Pretji. Lata Batlsal, 5r. .. , . , v' . . . Advocate with Mr. R , Advocate.; Mr.-Kiran Babu, Advocate ' Mr. Kama! Sawhney Standing'Counsel. . uchir VERSUS. Bhatia; deal , Sr. M/S NATiONAL TRAVEL SEIRVICES - , , « .R.ESP©:[MDE!Nnr.^.' ThVough: ,.Mr; M\S. Syali, Sr. Advocate vv.ith Mr. U;a; ^ Rana,. . ; Mr., - Mrina! / , Mazumdar.and Ms. HusnarSyali, , . ' Advocates, ' A" ' . . liTA 219 OF 2010 A ^ ^ ' ' ■ , COMMISSIONER OF INCOME TAX "A" . ; . APPELLANT; ■ Through: Ms. Prem Lata Bansal, Sr. . . Advocate with Mr. Ruchir Bhatia, ■ y. ;>Advocate. k, Mr. Kiran Babu, Advocate ■ : Mr. Kama.!'Sawhney, Sr. . Standing Counsel.. " . VERSUS- ; ■" M/S NATIONAL TRAVEL SERVICES .' T S = . .RE ' • . Through: . Mr.': M.S. Syali, Sr.; /) ^ . v; .: , ' : Mr: U,A; Raha;, ,^ : • • S ; [vjazumdar and Ms| .■ Advocates: .. . . ; i SlffONDENT dvpcate with M'K ; Mrina I. Klsnal Syaii ITA 223/2010.219/2010,1204/2010,309/2011 Page 1 of 28 2011:DHC:14828-DB

ITA 1204 OF ..2010' COMMESSlONiiR ©F iNGOME,:TAX,' - nWPEUmrf'.' ' Througli:;' n Ms; PremLata-BailsplrSr; ^ n . . . n Adypcate with lyl;l^.Rlil€hi ^Advocate;;. ... n 1 ' y v,; n n : . .' Mp, Kiran Babu,. Advpcate .■ , MrJ<iamaiSawhney, Sr. " : : • - A • /standing Cpurisel. , ..;, / ^ ; y •;VERSUS;. / / - : : y V; M/S ISIATDONAE. T1RAVEL"SE.[RVSCES../' ' . ../[RESPOW.DEMT • Thrpugh: . Mr. M.S'. Syali, .Sr. Advocate vyith . ■ . . . Mr. ..U,A.. . Rana, ^ Mrinal , ; ' ■ • M.a.zunndar and Ms.. Hu ■ ■; Advocates. ITA 309 OF GOMMiSSlOiyElR OF' INGO.ME ; • ■ ^Tbrough,:. ' ■ ■ ■ « »■'„ APPEL.LAIi\'IT. Ms; Prem Lata Bansal, Sr. . Advocate with'Mr. Ruchir Bhatia,- Advocate. ^ Mr.-Kiran. Babu, Advocate ■ Mr.;.l<ama.rSawhney .Standing Counsel;,' ,.Sr.. .- A/EPSUSy . PjpliVlDElNIT ocate vi/ith Mr. Mrinal M./S NATtOWAL TIRAVEL SERVICES » ' ■ j . through: -Mr. M.S. Syali, Sr. - ■ Mr. ' U.A. Rana, /Mazumdar and Ms. 'HLisnal Syali •/ c. Advocates. . CORAM;-. ■ , . _ . ... y A HON'BLE NRJUS.T1CE-A;k:S1KRI' ' . y /HOM'BLE M.R JUSTICE-MXtMEHTAy, ■/■ ■ .■ 1. ■ Whether Reporters;' o.f Local newspapers' may , be allpwed to see the judgment? . ■ / To be referred to the Reporter or not? • Whether the Judgment .should be rep(J)rted. in they/"" Digest? ' ■' y- - •;.; . . . ■2. ■ 3. ITA .223/2.010,219/2010,1204/2010,309/2011 Page 2 of 28 2011:DHC:14828-DB

(e) - , -any' payment. by.ia -.Gompany,,: not .being a -company in .which ■ the' public ■ .are- substantially interested, of. any isum . (whether, as .representipg a part -of the assets., of-the. company or. othervyise)" [made after the'31k. day of May, 1987,^ by way of' advance or loan to a. shareholder;-being;-a person, who. is the beneficial. eWner 'of shares- (not being ■ shares entitled to', a' .fixed' rate'of dividend'whether with'or without-a'right.j to participate, in- profits), holding hot, less . than ten .per cent of the voting.'- power, or to any co'ncern-.in. which such-shareholder is a member ph. a partrier and in which he has a substantial interest (hereafter in this clause referred to as the said' coricdrn)]. or' any paymentvby ■ any such company on behalf, or fop. the. individual .benefit, of any such, shareholder,, toVthe ■extent to- which, the company in either; case', possesses accumulated profits;: ; . r . .-. ! MTA 223/2010,219/2010,1204/2010,309/201-1 Page 3 of 28 2011:DHC:14828-DB

l-t? ; j3u't."divi:den"d":,"dp,es;.n •; 'aVdistributidn"'made.-[nVac^ •clause- (c)\or:;Sub-cJaiJSd;;;Cg^^ of: a,ny,bbareVe issued to'f full -cash-'bonsibepation/bwh^re, fbeyiidlder : of the share js riot entitlfed ih- the bveht. of .liciUldatipe^ : to particlpate jh'the-sutplus 'assets;h,- -. f '[(/a) -'.a distribution .made in-'accofdarice y/itb. |ub-■ clause (c) 'or; sub-clause.- (b) ;;in; so.^far . -as- ^uch ■ distribution is attributable'to' the capitalised prjjfits •of■the compahy representing bonus shares:.allotted to its- equity, shareholders.'.; after. ■ the -Slst-.daY of . 'March, i964,/[and ,befo:re -the Ispday- of April, .4955]. (/■/)• ■ .-any advance: ofr'loa'Q made.tb;a' 'shareholder [or the said- CDncern']- by-a ■-compariy . b; th'e -ordinary:; course of its business,;,whefe:.the l.epding. of? rnoney..■ is'a substantial'part'of ;the'-business, pftheicornpany- (///■) - any. dividend paid:fby:-,a :conipany which,is set' off by the conipany- agalnst;th'e .whole or any-, part of any sum previously;;.pa-id .by -it. .and treated:; as-,a.°: ; dividend withi,b . the „rrieaning*' of sub-ciause. . (e); ,fo'.. .the extent to which it is-sO'set off; f, --y -f ;■ [(/V) any payment-, made: by- -a ^company;, oh- purchase -of its- own:.'shares .from ; a shareholder in accordance with ■the,.pnoyis'ions.df section 7-7A:bf-the Companies-Act, -1956 (i; of.-l-956); i (v) ' ■ any , ::distributionybf shareb. ipursuant' tp a) demerger by - '"theResulting '; cornp.any, . to | the- shareholders. of-the defnerged company (whether or -not there is;''a..reductj:oh)ofbapital .irf the.-'denierged'' company)..]";:; f: y 2. , This provision creates: a fiction ■;,prov|,(il n'dl. certain circumstances under -whioh'certa.i.n k^^^^ of.ba]|mferits made to the persons specified:therein afe;tb be treated as deemed, dividend income.. - As p e r tti is p ro'yi s i o hv, th e fo 11 q w i n.g co n d iti o n s. are to'be satisfied-:-' ITA'223/2010.'219/201-0.1204/2010,309/2011 Page 4.of 28 2011:DHC:14828-DB

(1) Th0 ypayer company,'.must be a closely ; hel,d y cbmp,any..' % , • v -'yy' n (2) It applies to any sumiypaid -by vYay :pf loan. on- ad.vance during the year to the v-following persons: y n (a) , l\ 3. .voting power'in the'payer company,' (b) A company in which such shareholder has,at least 20% of i;he ' voting po.wer. n . n ' ■. f, (c) A concern (other than company)! ; ■ which such shareholder has at • ' •20%;interest. ■ (3) The payer company has accumulated profits on the date"" of any such payrhent and the payment is out of accumulated profits. ■ , . (4) ■ The payment of loan on advance is not in course of p,fdinary ,business actiyities. . [1972] 83 ITR 170, the .'Supreme Court ahdiysed the •provision and pointed out that in so fa.r. as payment by a company by way of advance or. loan is cdncerned, it cap be,made to any of • the three persons mentioned therein i.e.Mt had thr.ee lirhbs and • explained the samelas under:-;;; ,?-. ..: y -r ,y ' ■ "Any payinent by a company, "not being a company ? in which.the public are,substa.ntially interest, of any- . • sumy(whether; as representihg a part, of the assets . ITA.22.3/2010,219/2010,1204/2010,'309/.2oil ' ■ ' ■. . ;; " . Page 5 of 28 2011:DHC:14828-DB

of the; company or. dthervvise),' .made" .aj 3li0.:5Vi9987. by way of aci.yanee or loari. , n - n ' ftet First limb: a) to,, a' shareholder^ being, persoh'.;whO n isj beneflciai- owner ■.of shares' (not -belng -shafes, ..entitled-to a fixed rat'eef .'dividend whether with or without' a'' right . -to ,participate' in . -profits) ■holding not;,less,than tem.percent of;the voting. - ■ power, . , ^ ■ .- 'Second limb - . .) . ■ b) or to my concern in which, -such shareholder sa ' ' member or a' partner; and-.in- which he has a substantial -interest' (hereafter ,In- this clause . referred to-as the said concern) Third lim'b . - - .. - - , , : . - ■ -; - . ) ' ' ■ c) or any. payment 'by. any fsuch company- on behalf, or for; the individual benefit,, or-any-such shareholder, to the'extent-to which the-eompany - ■ in. either case p.o'ssesses. accumulated profi ts." 1'^ • - In -'AB^kitech (supra), . this (Court .' was - concerned with the second limb ; and the question' that--' arose was: .when. the payrhent is made tq "a concern" in which such share holder ■|s a member or- partner/ahd he (has a) subs^^^^ interest, w;hether ' deemed . dividerid ,(inc-Ome . would :be treated as income iri the hands of such, concern, or in the- hands of such shareholder? It,was answered by holding that ;he provision ofl.Section 2(22)(.e) ;of the'Aettare lnot .applicahi.e lt such a concern which 'has'.receiVedThe.payrrieht buttis r A holder as it is the share holder who .is a membie - in such a company: which'.has . made the paynt 6t a share a partner t and that .ITA 223/2010,219/2010,1204/201-0,309/2011 Page 6 of 28 2011:DHC:14828-DB

iTiGmbGr or partnGT shall; havG substantial intGrGSt, bG trGatGd as recGiptrrlGnt of clGGmGd . d InpomG-.. T portion of that judgment-reads as under:;- le operative' "25. . Further,, it is. .an admitted .case' that, , under normal .circumstances, such a loan or' , advance . given to the shareholders or . to a concern, would not qualify .as dividend,. It has been made so 'by,' legal fiction created under Section 2(22)(e^\of the' Act.- ..We have to keep in mind that this legal provision relates to "dividend". Thus, by a deeming provision, it is, the definition' of dividend which is enlarged. , Legal fiction does not extend to "shareholder". When we keep . in v mind., this . aspect, -, the - conclusion would, be obvious, viz., loan or advance given under the conditions, specified under Section 2(22)(e)'of the Act would also be treated as dividend. . Jhe.fiction has to stop • here and -l is not ,to be extended further for. ay: ny; its id ic o'f broadening the cohce'pt of shareholders.by. w of legal fiction.'. It- is-a common case that a company is supposed tb distribute the profi]ts the ; form ,. of. - dividend' n to l ij shareholders/members • and, such divide cannot be given to no.n-m.embers..' :The sebc category specified under 'section 2(22)(e) the Act, viz., a. concern-, (like .the'assessee herein), which iS: giyen-the loan or advance is'l admittedly not a shafeholde'r/rnember of the' 'payer ' cortipany.. ',.Therefore, • under no circumstance", ' it could' - be ' treated ' as, shareholder/member receiving dividend. . If the intention of the Legislature-was. to tax such loan or advance as deemed dividend at the hands of "deenning i shareholder"/- then the Legislature would have inserted, deeming.' provision in respect.of shareholder as well, that has not happened.' Mp'St of the arguhnents of the- learned counsels for the Revenue would stand answered, once we look into, the matter from this perspective. ITA 223/.2610,219/2010;1204/2010,,309/2011 n Page 7 of 28 2011:DHC:14828-DB

;h . 53 n 26. in'a case likq^this) the.reeipient w^ bej a .;; •shareholder.by w 'provision. ,It is , not correct on the, part of the Revenue:to argue ; that, ii' this, position' is' taken, then the;income ' "is not taxed at the::hahd's;of^the recipient", v- Such an argument based :o:n the. scheme-p^ tlpe ., Act as projected''by the learned ;counsels; for.; the Revenue on the basis of Sections .4., 5, S,;;: ; ■14 and 56 of .the >ct would be of no .avpil.ih Simple • answer ,tp:. this; a.rgurhent is that .suy Ipan or advance, 4ri the .first, place,, is- hoti income. Such -a loan or- advance has tOj j )e returned by the - rec.ipient to the company; which has given the loan or advance., 27. Precisely, for.this Very reaspn; the Courts'. : ■ have held that if the amounts advanced-are'for ■. . business, transactions between the, parties, - . ■ ' such , payment ■ would^■; n the deeming dividend under . Sectiom 2(;22-)(e). of • the Act."- y ; y ; r". . ..V-.y 5. - We. may alsp point out thati'-whije coming .to thi;; conclusion,- - this Court concurred .with the.-: same, view expressed by the " ■-. ■Bombay.-.High Court:\r[ Cdmmlssminer pf t's.;"- .. : . . . Universal Medica.te'.'.CP) 190-Taxman 144 " (Bom.) , which had approved the decision,.,of. .the Specie Bench ■ Mumbai. in the case-of -^OT.-Vs.' L&dld - 118 ITD 1 (Mum.) (SB), and :Rajasthan High-Court in:the case Of CommsssBoniet :of '-Bncdme Tax Vs. (CTR (Raji) .527. ':hy v .7 . y y 'Tt'- !17. Though, in, these, appeals also we. are. concerned ■with the. - t,.-another facet of this. . ITA 22.3/2010,219/2010,1204/2010,309/2.011 I Page 8 of 28 2011:DHC:14828-DB

provislo:n .has ariseh; for consid5ratiori.;lDecaus,p ot have' .to^■ proceed: further,.from :stage;\A/here; ,we lef^ Ltd.^(supra). ;' ; > 7. , The- respondent/assessee is- a- partnershlp .firm cprisisting - of • , three partners namely Mr. IMaresh Goya!,.Mr., Surinder Goya! ., .and M/s Jet Enterprises Pvt. .Ltd.. having profit liharing; ratio of 35%, 15% and 50% .respectively. The assessee firm, had; - . taken a loan-of ? 28,52,41,515/- from M/sJetOir Pvt..;Ltd.. l\lew. Delhi. - In. this, compaiiy-the assessee; has- invested by Subscribing' to the equity share .namberihg ,1,43,980 of ^ 100 . teach which constitute 48.1.8%..:. However, the shares were, ■- - purchased - in . the nam.et of. the two- .partners- namely Mr. ■ ' . . Naresh Goyal and Mr,-Surinder Goyal.- Thus, whereas, Mr.,, ■ Naresh Goyal and- -Mr. 'Surinder Gpya.l vare the. respective -Share holders, the .assessee; is-'the beneficial share holder. On these facts, in /this .appeal.we., are'concerned with the first limb [in contfa'diction .to second limb ;hat fell for le upon id |-f22)'(e)-of - interpretatipn in Ankitech, (supra)] .and are Cc examine as. to whether this fim^^^ the Act has-been, .satisfied; . We should.-.pOint •but at .the outset tha.t it is an ..admitted ppsition that all other co.nditionS Stipulated in Section. 2(22)(e) .of the; Act are, fdlfilied. The ITA 223/2010.219/2010.1204/2010.309/2011 Page 9 of 28 2011:DHC:14828-DB

'9 GXtGnt of sharG-holding is also S0:.hlgi'i that thG assGSSGG has. n ^Indubitably.substa:ntfal mtGr^^ injGtairPytrLtd; ; . n n For attracting .first limbrthGvrGquirG^^ of the provision is n that thG payiTiGnt is madG: by a conipany "by way of advancG ^ or loan to a sharG - hbldGf, n bGing a qoGrson who is thG ; -bGnGficial ownGP .bftshares"; ThG- quGStion which calls ,for ;■-JntGrpretation is as td whGthGr samG-is to bG.paid by way. of advancG or loan ;to'a. sharG holdGr who is also the bGnGficial /ownGr of thG sharGs. to put,,it dth.G'rwisG, is it !|nGCGssary "that both thG conditions havG to bG satisfiGd p irEjly such a., person 'to■ whom thG'. payniGnt is madG isj -nit only a, , rGgistGred share holder but a bGnGficial share |h,older as welj.: .. v.Before we procGed to answer the. question, we would like to. ...repel the. prGlinilnary "submission advanced, by Mr. " Syali,- .. . learned .Senior Counsel for the. assessee; .,t;hat this aspect is ' also covered by theludgmentin (supj"a}. ..Mr. Syali . ventured to make this submission embbldened by. the fact that the ' decision of ..special Bench Bombay CoSour (supra) has been upheld by "the Bomb.ay High . Court in UiniivGS'SBt Medicare. ■ .(sup.ra)- a.nd. in.. AinkStech (supra) ' this Court has cohcurre'd: with. the. said; opinions. On this - ^■ .basis, it was. pointed out that following observations of the' in ITA 223/2010,219/2010,1204/2010,309/2011 . . Page 10 of 28 2011:DHC:14828-DB

sy^ered ■; tlie,. discussed 'and answered and ,not what caii deduced .therefrom; The issue with which we ]3 was neither the .issue nor deliberated upon.if ITA 223/2010,219/2010,1-204/2010;309/2011 ■ 'i' . ; • , bei logically e (joncerned Itj. ,,i:s for; thi& 'Special iB.erich, MumBai; in ;,para .2'4 squarely ap question ■posed dh. .these appeals which is mpr :|duced in .Ankstech,. [supru) also. This;para reads as und.^ ■ '^24. The expression "shareholder-being'a; person' . who- is the beneficiaF owner of shares"' referred to.- ,' in' the first limb of Section ,2(22)(e). refers to both - ■ ' ' ■ . - . a , . registered ■ shareholder and.; beneficial ■ shareholder;.. If -.a . person ' is .a; '-registered . shareholder 'but .hot the' .beneficial . .then the, - " . ■ provision: of .Section : 2(22j(e) . will ■ not apply. - Similarly if a personds a beneficial -shareho'lderbut ■ ; - ■ not- .a.' registered- s.hareholder then- also, the first . - '; ■ limb of provisions'of' Section 2(2.2)(ej will ' not, - . - ■ ■ " apply',".' ' -C .'Vrd.'T.. .' . - .id.; ;• No doubt/Ankitdch;;,(s'upra);affirmed the view taken by the • ; ■ -" Special Bench m Bhhiumsk Colour Isupvdi). Hpwever, the entire judgment in'''4ofa"tecjfif(supra), ;is'confined;to second , ; .f i 'Hmb of-Section^2(22)(e)m'f thd Act' anddtjs thqtaspect only■ ' ' .'as . highlighted above , as. we.ll;' ; which . Was the focus, of ./ '... '■ ' -■ .attention, .and answered. Np doubt, in .the afores.aid para of Bhaumsk Colour :(sup.ra). Special'Tribunal has Qomrriented - upon-the first limb of Section :2'(22),(ej'of.the Act as well 'but; . ' the veracity thereof had not arisen, fpr consideration, as that .- ' was not the issue i'nyolved'.. .if is trite that the. ratio, : of a. case • ' is to be culled out from the ques.tipn'that specifically arose,: r. Page 11 of 28 2011:DHC:14828-DB

n reason tha.'t we need to giye a fresh look .to 'thiiitouestion in the present case. It would be. a different iwa.tter, whether, we. ' .-ultimately agree with, the aforesaid yiew of..'the Tribunal - ira^ . n'Bhaismsc' CoSpur {supra)' or riot/ nn y, '. 11. . VMr. S-yaTi, learned Sehipr Counsel; submitted that mnder the " n Income Tax Act, fotth.e .purposes of Income Tax partnership, Tirm is'different from .the; partners.'The, income earned" by • , /..The partnership firrri;\js,"also assessed n at the hands of .the partnership firm which, is required to;file its-own return. The • profits distributed thereafter to the partners'become income h rat the hands of the-: partners and . partners are separately n tossessed/wnder the::incorhe tax-. Act. / He biso Preferred tq. r :> .various provisions . of . the. Companies Act To buttress his : n n submission that the, partnership firm "in its owp rrjjit can be ." n the shareholder distinguished-, . from Ijh'e i partners; Themselves. Specific attention was drawn to Sectipn, 187 (c) of the Companies;,.Act which draws^ d the. registered shareholder and. a person, holding a beneficiai: interest in any share. " He also referred to the guideiines issued by the SEBr mn-'ijpint share holding; iiy respect of v./partnership firmfinterpreting the provisions;of Section 187 .(c) . . ; bf the Companies Act. ,. Vide:Xircul.ar Nd.B/lB/? S-CtoV: dated ITA 223/2010,219/201.0,1204/2010,309/2011 n ; Page 12 of 28 2011:DHC:14828-DB

/ March; 1975v -Tbe :SEBI h^ claTifled the position in the following nnanner:-- ;' ■, ■ ^ r Where, in the case of partnership firnis,^shares are acquired^ ih; the hames of one or more or other partners, the, partners, will have to file ,a' .declaration both under sub Section 91{J) and under sub: section (2) because they have also beneficia interekt in the. shares held by them on bel^a -of all the partners. ' , no ill es ail. DFe rm se. Department's view.- A partnership.firm.is a.'person capable ,of being a member v\i;i| the, meaning of^Sectlop 41 ofthe Compar Act, 1956 and since a partnership is no legal entity by- itself but only a cqnhpendious way of des.cribihg .the: partners constituting the firm, it is .necessary that the .names of all the members of the; partnership firm should be ,entered in the Register of. Members in order that the right„of the partnership as a whole to the shares in.question may prev The holding dfmhares -by only, one or m^ ' partners on behalf of other partners qf a fi should ■ not,' ■' therefore, ordinarily . ari However,, where in a given case, the, name or names, of only one or some of the partners entered in the Kegister:of Members while the intention is, that the rpartnership;qs a whble, should have : the .:r,ight of me.mbership .. in respect of ..the ,'share's in .question. It is obviously necessary' for,, such - partners- who hold shares.not only.for respect of the shares in question, it is; obviously oecessafy for such, partners, who .* hold. 'shares hot , - only for themselves but for the benefit of all partners constituting .the, firrn; whose names .qre - not entered' in the Register, of. Members, .to comply with.the rules under Se'ction',,I8.7C.'' . ITA 223/2010,219/2010,1204/2010,3,09/201-l' . a" r Page 13 of 28 2011:DHC:14828-DB

12.;, -:5ub Section. (2) ;and j7^ of Section IBT-C 'of till ;; Act are reproducecf,as unden-^.'^ f 2 Companies- V V . "S.187-C. Ceciaration, by persons : not holding . beheficial interest; in any share: ' (2) Notwithstanding anything, contained elsewhere in this Act, a person -who ho ds a beneficial interest, in a. share or a class of-shares of a company/shali,- within thirty days.'fro-the commencemehti of the: Companies' (Amendrjrient). Act, . 1974, or -Within - thirty , days . afteij . ,h.is becoming siich, beneficial, owner, .whichever is later,, ;mal<e a; declaration to the- . company specifying the nature.of his,'interes,t, particulars of the person in . whose'name the shares stand registered in the books of;.the company and such other particulars as may be prescribed. ;V- ':-( y ^ V...--' '- f ;(6).-.c;,;y. y d .. f ; ' (7) Nothing in this section shall be. deemed to prejudice the obligatipn of a company to. pay dividend in; accordance with . the . provisions of Section 206, and the obligation.shall,, on such payment, stand discharged, ' V . . ^ the trustee referred to in Section .187.6 or after ' the commencement of ' the Conip (Amendment) Act, 200-0] - yfto c i arl hd i- les , t 13. - He. also: referred, to fthe- provisions:-of Section 153 : in .. . conjunction with Section 147 pf-the Companies Act. Section • ,150 of the Act mandates-every, company to keep register .of n ITA 223/2010,219/2010.1204/2010,309/2011. Page 14 of. 28 2011:DHC:14828-DB

/ - n ' its.- members., an.d , enter .paFtic.uiars: gs. specitied in, that provision . which.- -includes ^ ,t narne,.l address and ..-the n occupation, if any:. of each'rhember. . On this basis,- it vvas argued that a member whose ,nanne.' i-s .entered.-in the said register is to be treated as 'shareholder'. Section,41 defines 'member' and give.s the definition of .'.member' inter aiia • stipulating that, person who.has registered his name in - the - register of a company and . .. whose name is entered in its ; register-o'h members, shaltbe a memiber of the Company. .-.Sub Section (3) of:S,ection'.4'l-'d,eais with .beneficiahbvyner in: the following manner:.- ' r - ' - -C; • ''41/Definition af''member'' . n ' -to - .; d o :;; ^ ' ; - . (3) [Every person holding equity share'capital ,o of company and whose , riame is mntered'as beneficial owner " in the records. of the depository shall .be deemed to be .a merpber of - . . a concerned corhpanyi'' ; : r. 14. It was thus argued that only .that beneficial dwner whose name is-entered aS beneficial: owner in' the records of the ■deppsitory, would -be deemed to'be. 'at member of the. .^.concerned mpn^panyO . UnleSs. this condition is Satisfied, a . beneficial-; owner; cannot be . treated as 'Inhember" ., or ''shareholder''of a'cpmpany.': * . . .. ' ITA 223/2010,219/2010,1204/2010,30.9/2011 . Page 15 of 28 2011:DHC:14828-DB

/ ^ .the: cotiipany r.iaw and; hot 'the. latter.. W%:.are,.,.. : ' n n ' ' therefore, of the view thatdtjs only where y n n' is n advanced hy-..the, cOrh'panyhto^^^ V : shareholder ahd the. other conditions set out in Section 2(6A)(e):.are satisfied that:the amoUnf:;of . the loan would be liable tp be, regarded as . " ' n - . 'deemed dividend" within "the meaning ,of ■Section. , . ■2(6A)(e). " .y \ • It was" held that Hindu ■.■Undivided -Family: cannot- be considered to ■ be a share holder and the loans given to HUP could not be, considered as jodns. advahced to; a., shareholder of the company, therefore, could not be deerhed .to be i-tS' income. Referring to the afores,aid.:j'udgnnent, the -Allahabad High Court followed the view - that since the firnn. was hot the shareholder and the shares were in the naime of partners, the loan advanced.-by the company' to the" tirm .could -notiyae deemed' to bp ,a dividend.; Following discussion on; this, aspect by the Ggurt-is reproduced -below:- ' ''■"■A'-' . .'i it' i' s I- .■ e s' "Clause (e) of,"Section...2(?2) Of the Actj, existed clearly provide . that..,jf. the lo'^' received by the shareholder, it.is only thpl said loan can bd deemed to be'dividend liiii' hand. In the . present case, admittedly, the assessee firm; was, Ipt, the shareholder of the .Company M./S Jal Pral<ash.;Associates (R) Ltd. and the :partners of 'the firm -were - the shareholders ■;in- the. books of . the ■Company,; therefore, the.loan advanced by the Company •to the firm .cannot be deemed .to.'be dividend Inasmuch as .loan was not to the shareholder but to the. partnership 'firm which was not the shareholder in the books of the'Company. It is [TA 223/2010,219/2010,1204/2010,309/2011 > • ^ Page 17 of 28 2011:DHC:14828-DB

settled principleof, jaw the -deerning pfovisiori has to;be Gonstrued.strictlyv-' /j: y, In the' case^.:of .Ho Ltd.; v-' [1959]361TR21-5(S(::) ^thejApex Court;held-ttiat a person- who- has purchased shares ..in a company under a blapk transfer and in.whose; name the Shares have not been.;registered in the books of .'the, company , Is not a ."shareholder"-in respect of .such shares-within the meaning of Section 18(5) -of 'the Income Tax Act, notwithstanding-his equitable rigl^t to the dividend , on- such = shares, . and is; -no<^ therefore, ; entitled; ;-to . , have ;- this dividen income grossed up under.Section 16(2) ofiltn Act by the additiori:.o.f the Income Tax pal, Id the company in respect of those sharesfj jat;;) -Claim credit for the; tax deducted at under Section 18(5) .of the Act. The'Apex C held.as follows: n ' . ' n •i "The word "holder of a share" are really equal ' to-the word '•'shareholder", and the expression ;." holder ofra-vshare" ,;denotes, in (so far as the cornpany is cohcerhed,-ohl.y a perspn who, as a .shareholder, has his' name .enter the register of niembers'; The , position) .Ctherefore, -^ under the Inijian Companies^ Act, .I913,.;hs quite .clear that the expression "shareholder", or "holder of a share" in so far as that Act is'concerned, denotes no other person except a "rn.ember',';.:;.. The question . that falls; for consideration- . is whether-the meaning given to the. expression "shareholder" used,in Section 18(5) of the Act by these cases .is: correct. No. valid reason exists- why "shareholder" as .used in-Section 18.(.5) should, mean a person: other than the ■ope denoted- by the sahne expression ' in .the- . Indian Conhpanies Act,. 1913. in-VVal^ Wynaad Indian Gold Mining Company., In re' (1982)' 21 Ch.D; 849, 854.Chitty> J.f;bbServed;r ;. -ITA 223/2010,219/2010,1204/2010.309/2011- Page 18 of 28 2011:DHC:14828-DB

"1 use .now myself the'term Which is common |i[ courts,-'a sharehoider', What means-the-hold'! the shares. It-is tBe- common term .used;, and:! means-the person wh.o hoids.the shares-by. ha his name on the-;register.:'!,W - y- ' Wy!;'! ! . Section' 19A- makes- it clear, anW"doubt'existed^ 'that by. the term ."shareholder"- is" meant, the person whose^ narne -and. address are entered ..in. the register of "shareholders"-maintained-by the company.'.There is but on'e.'register maintained by - the company. There is ho separate- register of ."shareholders" such as the, assessee claims td be but only a register of "members". This takes us immediately to; the register.-of fnembers; demonstrates that evens for the'.purpose of ' Indian Income-Tax Act,, the worcis"-memb'er" "shareholder" can be read as synonymous. . and; the and .16. The words of'Section l'8(-5)- must 'acCordingW be read in the light in which'the,word "shareholder" has '.been used in the subsequent sections, and- read in that Tmahner,,' the''present, a.ssess-ee, . notwithstanding- the. -equitable right ..to n the dividend, was- not entitled, to be 'regarded as-a "shareholder" Tor the purpose of Section-1.8(5-) of the Act. That benefit can;, only go .to the person,- who, bo'th in law.and in equity, is to be'.regarded as the owner of the shares- and bet-ween -Whoni and the company exists the. bond of,membership and ownership of'a-.share- in the ,share capital of the company." n : ; . ". . - " - ' ■Coming, to,, the' meritsf-of 'the issue; submission of jearnec! Counsel for the appellant was thatianguage of Section, 2 (22-) (e) of the Act clearly spells out: that :,a' beneficial - owner .is treated as share holder-under this provision,; : . Sh took- the matter at the pedestal of first. principles relationship of the partners yis-a-vis partnersh Vhich the , i|' generally construed. Expanding- this," argument, she - referred ■ to "ITA 223/201-0,219/2010,-1204/2010,309/2011 2 Page 19 of 28, 2011:DHC:14828-DB

Sections 14,15,16 and 18 of Partnership.Act and argued that- as^ per .these provisions, a ; pa,rtnersdip jfirm. has . no separate entity and it .is; synonyms:, with the par^ contradistinction . tO: a cpmp.any . incorpora.ted:. .under ; . the Companies Act which enjoys, the status oh an indeperid.ent , . . legal entity and is a. juristic persdnri separate from /its rhembers i.e. the . shard hdlders).. She thus, argued that ' -when the shares areibought/by a partnership firm (which is; . ; admittedly a beneficiai owner), for want of its own legal entity, per force these share are to-be bought in the narne of .partners. .However, for all intent and purposes it is a / partnership firm which would be the shareho .d n the. purposes of Section ■2(22)(e);. of :.,the A^||| argued the learned .sehipr Counsel, .the very p provision would be. defeated, in. the case of a paitnership firm", as in no case;.shafes would, be bought in the name of .. partnership, firm./since it/is/hot permissible in. law. She. . further submitted that/one does not have to resort to. the provision of the Companies Act to' find -but who is the shareholder. She .also, submitted that the Supieme Court- /.:judgment in (supra) was.',iend0t'ezl before the amendment to Section 2(22)(e) of the Act. She also argued : that there is.. a / diffefence-. between ." the HUF and the en is well for" I Dtherw-ise', I • irpose of this. u ITA 223/2010,219/20,10,1204/2010,309/2011;■ . Page 20 of 28 2011:DHC:14828-DB

(A) in his order passed in ITA 1204/2010.' on i to the We have given our thoughtful considera submission of the counsel for both the parties.. According to us the outcome of this appeal depends on the following two questions:-. e) of o has

(1) To attract 'the first limb of Section 2 (22) the-Act, is it necessary that the. person wh( received the advance or loan is. a. sharetiolder and also beneficial owner. To put it otherwise, whether both the conditions are required ito be satisfied wi l l depend upon the interp-retation to be given to the words " being a person who is a , beneficial ;owner of shares...." n Which Was inserted by - amendment in. the aforesaid provision carried out by the Finance Act, 1987 w.e.f. r'April, 1988.

(2) Whether the assessee who is a partnership firm can be treated as'shareholder' because of the reason that it has purchased the shares in. the name of the.two partners.. n 18. In so far as first question formulated above is concerned, Samwsirmal answer to that can be found in Vst CUT 122 ITR 1, (5C) which followed the jqc case, of Commsssiones' of Income Tax \/s.|p rf ent in the Pv Sarai ITA 223/2010,219/2010,1204/2010,309/2011 Page 21 of 28 2011:DHC:14828-DB

Mudaisar [1972]';83 ITR . 170. That wa's a'.case'where the 1; loans of a Never, these assessee.. was HUF which had obtained - certai company: whose, shares it beneficially owned. Ho'; shares stood in the name-of S.M-. Sharia (Kart.a) of the said ■HUF in the register of shareholders'of the compaipy.. The loans .. were advanced by the company to three concerns;'which " were owned: by the assessee/, HUF., The Court held that-conditions stipulated In Section. 2 (.6A) (e) of the .Income Tax .Act, 1922 (which, is akin to Section 2 ,(22)(e> of the present Act) were not satisfied and the .amount of loan . would not fall within the mischief of this Section as the HUF- was not the shareholder even when it was. beneficiaT owner of the shares. It is clear therefrom that both .the conditions, have to be satisfied. This view has -been followed by the Rajasthan High Court In the case 30 while of Harish' Chand .Golecha ¥s, CIT, 132 LTIR . I hcome Tax ' beneficial dealing with'the present provision contained in tf Act, 1951. The expression "being a person owner of sharefe" .qualifies the word 'shareholder'. ' .'Thus to attract the provisions of Section 2 (22) (e). of the Act, the person . to whom the loan or 'advance. Is made should-be a shareholder as well.as beneficial owner.- 19. This brings us to the more important issue yiz whether the assessee firm can be treated as a shareholder having ITA 223/2010,219/2010,1204/2010,309/2011 Page 22 of 28 2011:DHC:14828-DB

purchased shares through its partner's in the company which has paid the loans or is it necessary that a sharehol'der has to be a Yegistered shareholder'.' If the contention of the assessee is accepted, in no case a partnership, firm can come within the mischief of .Section 2 (22) (e) of the Act because of the reason- that shares would be purchased by.the firm in the name.of its partners as the firm is not having any separate entity of its- own. With the name of the partner entering into the register of partner shall ut hot the rship firm. members of the company as shareholder, the sale be the 'shareholder' In the records of the company - , n n n n n n n n n •!! n beneficial owner as 'beneficial owner' is the par J" n . ' ' - I This would mean that the loan or advance given, by the company, would never be treated as deemed- dividend either in the hands of the-partners dr. in the hands of partnership firm. In this way the very purpose for which this provision was this provision September, enacted would get defeated. The object behind is succinctly stated in the Circular No; 495 of 22' 1987 particularly in the Explanatory Notes to Finance Act," 1987 when this provision was amended. It reads as under:- "With the deletion of Section 104 to 109 there was a likelihood of closely held'companies'not distributing their profits to shareholders by way of dividends but by way of loans or advances' to that these are not taxed in the hands of the. shareholders. The forestall this manipulation, sub -clause (3) of clause (22) of Section 2 has ITA 223/2010,219/2010,1204/2010,309/2011 Page 23 of 28 2011:DHC:14828-DB

the is ng e JS trill been- suitably amended.- Under the n existing provisions, .. payments by way of loans ' or advance. ' to "shareholders' having subsfantia interest in a company to the extent to which company possesses a'- accumulated profits treated as dividend. The shareholders hav substantial interest are' those who ha^.e shareholding carrying not less than 20 perj jC: voting power as per the provisions of clg (32)' of Section ' 2. The amendment of j definition extends its application to payrirent: made (i) to a shareholder holding not less|than 10 per cent of the voting power, or (ii) to a concern in which the shareholder has substantijal interest. Concern as per the newly inserted Explanation 3 ,(a) to Section 2 (22) means a HUE or a firm or an association, of persons or a body of individuals or a company. A shareholders having a substantial interest n a concern as per part (b). of Explanation 3 is deerhed to be One who is beneficially entitleci to not less than 20 per cent of income of such concern. - ' • ' 10.3 The new. provisions would, therefore, be applicable in a case where a shareholders has 10 per cent or more of the equality capital. Further, deemed dividend would be taxed in the hands of a concern where all' the following conditions are satisfied: (i) where the company makes the payment by way of loans'o.r advances to a'.concern. (ji) Where a- member or a partner of the concern holds 10 per cent of the voting power in the company;^ -arid (iii) where the member or partner of the concern is also beneficially entitled to 20 per cent of the income of such concern.. With a view to avoid the hardship in cases where 'advances or' loans have already been given, the new provisions have been made applicable only in cases where loans ' or advances are given after 31®*^ May, 1987."' ITA 223/2010,219/2010,1204/2010,309/2011 Page 24 of 28 2011:DHC:14828-DB

fulfilled.That is not the purpose of law.' the partnership firnr is synonyT of the.paYtners. 'As''perthe Circular issued by the SEBI dated March, 1975 .interpreting Section 187 (c) of the Companies Act, - relied by the learned counsel for the. ■assessee himself, a partnership firm is not a person capable,of being atrnember' within the meaning of Section 47 of the Companies Act. Itjs further explained, that since a partnership firm is not a legal entity by itself but only a compendious way of describing the partners constituting the firm, it is necessary that the names' of all the m.em partnership firm should be'" entered In the Members. Obviously then, with the purch.ase of the firm in the name of its partners, it is the firjjn " : ■ • ■ [I be treated as shareholder for the purposes ofiS (3) of the Act. oers of the Register of shares by yhich is to !i ■ii lion 2 (22) 22. It would be difficult to accept the. contention of Mr. Syali, predicated on the provision of Companies Act as wherever'a partnership firm' wants to come.out of the rig.ors of Section 2 names of all" Register, of (22)(e) it can easily do so by not entering' the the members of the partnership firm in the Members. In this case itself,, ft could be seeh'that Mir. Naresh Goyal holds 44.58% of shareholding in'M/s Jet Air (P) Ltd, as a partner of the appellant firm.. On the other hand, the said 0 ITA 223/2010,219/2010,1-204/2010,309/2011 Page 26 of 28 2011:DHC:14828-DB

Mr! Narersh Goyal: deiives^ 35% of.'.the pfofjt sK^ the assessee fiririV' :In other ,words;;;Mr. .N has substantial Interest in the. assessee firrn toor. Thus- he' is a person who not only''has, substantial n interest .but also hb'.lds Sufficient infli'uence.. Sincevthe, partnership ;fi:"m " is "the beneficial ,owner, and it has to per force- purchase the shares jerson like, hn whose : In the name .of the partners, it. js very easy for .him to ensure that , only the narnes of partrif name shares are purchased is .entered. in the rec.ords, of the company ,' and, th.e names bof all tthe partners -are not "recorded so that ' provisions n of .Sectioh 187C . of d Companies Act are not fulfilled/, Li-kewi^ be . ensured .that for thd; purpose'pf"Section 41 (3) of. the. Act, the . name of the partnership firm js not specifically entered as ory/to„.make the n concern' k-. beneficial owner in the records .to the deposit ' partnership fjrm as. deembd, mernber of " company within the'.meaning of. Section 41, (3) of the Act; Such a'situation cannot be countenanced. , -; . 23. We are, therefore,, of the opinion• thatvvfor ..the-purpose of , - „ Section 2 (22) '(e) of the Act; partnership firm, is to be,treated n • as the sharehdldef and, it is not necessary that is has to be- . ;Yegistered' .shareholder'/fWe-^^ the questions' • formulated in. favour iof, the Revenue. and ; against the ITA 223/2010,219/2010,1204/2010,3,09/2011 ' . Page 27 of 28 2011:DHC:14828-DB

assessee as a result, this appeal Is allowed set order ,of the Tribunal and restoring ■that of it Officer. ■ n( le aside the Assessing II, 2011 skb '/ ■■■JUDGE I—. I) ITA.223/2010,219/2010,1204/2010,309/2011 Page 28 of 28 2011:DHC:14828-DB