PALLAVA RESORTS PVT. LTD.,,CHENNAI vs. ITO, CORPORATE WARD - 5 (1),, CHENNAI

आदेश आदेश /O R D E R आदेश आदेश

PER MAHAVIR SINGH, VP:

This appeal by the Assessee is arising out of the order of the

Commissioner of Income Tax (Appeals)-3, Chennai in ITA

No.103/CIT(A)-3/2018-19, order dated 27.02.2020. The re-

assessment was framed by the Income Tax Officer, Corporate

Ward – 5(1), Chennai for the Assessment Year 2011 – 2012

u/s.143(3) r.w.s.147 of the Income Tax Act, 1961 (hereinafter

“the Act”) dated 30.12.2018.

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Assessee is barred by limitation by 96 days and the learned

Counsel for the Assessee drew our attention to Form No.36 and

stated that the order of the Commissioner of Income Tax

(Appeals) was received on 04.03.2020 and during the outbreak

of ‘Covid-19’ pandemic. The Hon’ble Bench took into cognizance

the Order of the Hon’ble Supreme Court the “Suo Moto WP

03/2020 dated 20.03.2020 while considering the condonation of

delay. It is a fact that ‘Covid-19’ pandemic was prevalent during

the period and in term of the directions issued by the Hon’ble

Supreme Court in Miscellaneous Application No.21/2022 in Suo

Motu Writ Petition No.3 of 2020, we condone the delay of 96

days and admit the appeal for adjudication on merits.

the reopening of the assessment u/s.147 r.w.s.148 of the Act

vide Ground Nos.2 to 6, as under:

“2) He erred in re-opening the assessment of the Appellant u/s.147 of the Act, beyond a period of four years as the Appellant had truly and fully disclosed all material facts necessary for completion of the original assessment (completed u/s.143(3) of the Act) and, hence the first proviso to Sub-Section (1) to Section 147 of the Act would apply.

3) The CIT(A) erred in law in re-opening the assessment as the reasons recorded for re-

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assessment does not state that there is a failure on the part of the Appellant to disclose fully and truly all primary material or relevant facts which were necessary for completion of the original assessment.

4) The CIT(A) failed to appreciate that the details of loans obtained by the Appellant from QNEI were available in the financial statements which was on records, while completing the assessment of the Appellant under the Act.

5) The CIT(A) failed to appreciate that between the date of the order of assessment sought to be re-opened and the date of forming of present opinion by the Assessing Officer, while re-opening the assessment, nothing new has happened, there is no change of law, no new material has come on record, no information has been received.

6) The CIT(A) erred not to note that an assessment completed u/s.143(3) of the Act cannot be re-opened on account of change of opinion on the same set of facts available with him during the original assessment.”

regards to the addition made by the Assessing Officer and

confirmed by the Commissioner of Income Tax (Appeals) on

‘deemed dividend’. Firstly, we will decide the issue on merits,

i.e., the deemed dividend u/s.2(22)(e) of the Act assessed by

the Assessing Officer and confirmed by the CIT(A). The Ground

Nos.1 and 7 to 10 raised by the Assessee are as under:

“1) The CIT(A) erred both in law and on the facts of the case in treating an inter-Corporate Deposit received by the Appellant amounting to Rs.1,40,67,365/- from its Holding Company, viz.

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M/s. Questnet Enterprises Private Limited [QNEI] as deemed dividend u/s.2(22)(e) of the Act.

7) The CIT(A) erred in not appreciating that from a factual perspective, the Appellant was never a shareholder of QNEI and hence the provisions of Section 2(22)(e) of the Act would not apply to loans obtained by it from QNEI.

8) The CIT(A) erred in not appreciating the legal position that the provision of Section 2(22)(e) of the Act can be applied only in the hands of a person who is a recipient of a loan and the shareholder of the Payer Company. Since, the Appellant was never a shareholder of QNEI, the provisions of Section 2(22)(e) of the Act would not apply to the Appellant.

9) The CIT(A) erred in not following the jurisdictional High Court decision in the case of PCIT Vs. Ennore Cargo Terminal Private Limited [406 ITR 477] (Madras High Court).

10) The Appellant, therefore prays that the re- assessment be annulled and the addition made u/s.2(22)(e) of the Act amounting to Rs.1,40,67,365/- be deleted.”

Private Limited company namely, Pallava Resorts Private

Limited and it has filed its return of income on 01.10.2012. The

original assessment was completed u/s.143(3) of the Act and

subsequently the assessment was reopened u/s.147 of the Act

dated 30.12.2018. The Assessing Officer during the course of

reassessment proceedings noted on perusal of the financials

that the Assessee company has received a loan to the tune of

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Rs.1,40,67,365/- from Questnet Enterprises Private Limited

[QNEI] during the Financial Year 2010 – 2011 relevant to the

Assessment Year 2011 – 2012. It was observed from the

financials of QNEI that it has accumulated profit as on

31.03.2011 at Rs. 12,21,49,133/-. The Assessing Officer has

brought out the shareholder pattern of both the companies, as

under:

Percentage of Sl. share in No. Name of the Shareholder Pallava Resorts Questnet Pvt. Ltd. Enterprises Pvt. Ltd. [1] Ms. Pushpam Appalanaidu 24.94% 75%

[2] Mr. Joseph Augustine 2.77% 25%

[3] Questnet Enterprises India 72.29% Private Limited

5.1 According to the Assessing Officer, the loan received by

the Assessee from QNEI is to be treated as ‘deemed dividend’

and is to be assessed to tax u/s.2(22)(e) of the Act. The

Assessing Officer issued a show-cause notice accordingly for

which the Assessee had replied that the deemed dividend is

assessable only in the hands of the shareholder and that there

could not be any incidence of taxation to it on account of the

monies received from QNEI. The Assessee submitted vide letter

dated 13.12.2018 that the provisions of Section 2(22)(e) of the

Act cannot be invoked in case of the amount is advanced by one

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company to another, who is not a shareholder of the company

and the shareholding of the common Directors cannot be taken

into consideration for the purpose of attracting provisions of

Section 2(22)(e) of the Act relating to the deemed dividend.

The Assessee further submits that even if the monies advanced

were to be treated as an inter-corporate deposits, the

provisions of deemed dividend would not apply in the light of

the fact that interest on inter-corporate deposit is not an

interest on the loan or advance under the Interest Tax Act,

1974. Therefore, the inter-corporate deposits cannot be treated

as a loan falling within the purview of Section 2(22)(e) of the

Act. He further pointed out that this proposition has been

upheld by the Kolkata Tribunal in the case of “IFB Agro

Industries Limited Vs. Joint Commissioner of Income Tax in

I.T.A. No.1721/Kol/2012 [TS-5376-ITAT-2013(Kolkata)-0].

5.2 The Assessing Officer noted that the Jurisdictional High

Court’s decision in the case of Commissioner of Income Tax Vs.

Ennore Cargo Terminal Private Limited reported in [2018] 406

ITR 477 (Mad) (HC) is pending before the Hon’ble Supreme

Court in SLP filed by the Revenue and hence the claim of the

Assessee is not acceptable. Therefore, by invoking the

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provisions of Section 2(22)(e) of the Act, the Assessing Officer

made the addition of deemed dividend amounting to

Rs.1,40,67,365/-. Aggrieved, the Assessee preferred an appeal

before the Commissioner of Income Tax (Appeals).

provisions of Section 2(22)(e) of the Act and noted in paragraph

nos.5.3.5 to 5.3.9, as under:

“5.3.5 On reading of the above Section, it is clear that even if the loan or advance is provided to a concern in which there are common shareholders holding substantial interest, the provisions of Section 2(22)(e) of the Act will trigger.

5.3.6 In the case of the Appellant, a shareholder Ms. Pushpam Appalanaidu holds 24.99% shares of the Appellant and 75% shares of QNEI. Hence, it satisfies the condition of holding substantial interest.

5.3.7 The Appellant has further highlighted various case laws which state that the provisions of Section 2(22)(e) of the Act trigger only if it is received by a shareholder. The list of such case laws is provide below for ease of reference. • Commissioner of Income Tax Vs. Jignesh P Shah [ITA No.197/2013] (Mumbai HC). • Commissioner of Income Tax Vs. Ankitech Private Limited [2011-ITRV-HC-Del- 109](Delhi HC) • Principal Commissioner of Income Tax Vs. Ennore Cargo Terminal Private Limited [406 ITR 477] (Madras HC)

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5.3.8 It is pertinent to note that a similar finding in favour of the Appellant was also upheld by the Hon’ble Karnataka High Court in the case of Commissioner of Income Tax Vs. Namdhari Seeds [2017] 246 Taxmann 0061. The Income Tax Department had filed an SLP against the said decision and it has been duly accepted by the Hon’ble Supreme Court in the case of the Commissioner of Income Tax Vs. Namdhari Seeds [2017] 79 Taxmann.com 124. Further, the SLP application is also pending before the Hon’ble Supreme Court against the Hon’ble Madras High Court in the case of the Principal Commissioner of Income Tax Vs. Ennore Cargo Terminal Private Limited.”

Aggrieved, the Assessee is now in Appeal before the

Tribunal.

through the facts and circumstances of the case. We note that

the Assessee does not hold any shares in QNEI and that it is

QNEI that holds 72.29% shares in the Assessee Company. The

fact remains that under the Companies Act, 1956, as a

subsidiary company of QNEI, it is illegal to have shares in its

holding company. From the Balance Sheet filed by the

Assessee, it is noticed that the Assessee does not have any

investments and therefore it is clear that the Assessee does not

hold share in QNEI. However, it is noticed from the submissions

of the learned Counsel for the Assessee that the holding

company had regularly paid for the expenses of the Assessee

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and the Assessing Officer had considered these payments as

loans and had brought to tax as deemed dividend.

7.1 From the above, it is clear that the transactions

between the Assessee along with its holding company were in

the nature of current account and not in the nature of loans and

hence does not fall under the scope of the deemed dividend

u/s.2(22)(e) of the Act. It is pertinent to point out that ITAT,

Chennai Tribunal has taken the same view in the case of

Fairmacs Shipstores Private Limited Vs. The Deputy

Commissioner of Income Tax in ITA No.761/Mds/2014.We noted

that identically in this case also the payment should have been

made by way of advance of loan to a shareholder of QNEI. The

loan given by QNEI to the Assessee does not fall within the

aforesaid provision. Also, in the decision of the Jurisdictional

High Court in the case of PCIT Vs. Ennore Cargo Container

Terminal Private Limited (supra) it is held that, even if common

shareholders are there in both the companies, the deemed

dividend can be taxed only in the hands of the registered

shareholder of the company and not in the hands of the

company which has received the loan.

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7.2 However, the Bench took into cognizance the judicial

precedents relied upon by the learned Counsel for the Assessee

in support of his contentions. (a) The decision of the Hon’ble

Delhi High Court in the case of the Commissioner of Income Tax

Vs. Ankitech Private Limited reported in [2012] 340 ITR 14

(Del.) wherein the Hon’ble Delhi High Court has held that the

provisions of Section 2(22)(e) of the Act is not attracted if the

recipient is not a shareholder. (b) The decision of the

Jurisdictional High Court in the case of Commissioner of Income

Tax Vs. Checkpoint Apparel Labelling Solutions India Limited

reported in [2021] 276 Taxmann 312 (Mad.) wherein it has held

that since the recipient of the loan was not a shareholder in a

company from which loan was received, hence loan cannot be

assessed as deemed dividend. (c) The decision of the Mumbai

High Court in the case of Commissioner of Income Tax Vs.

Jignesh P. Shah [2015] 372 ITR 392 (Bom.) wherein it has held

that the provision of Section 2(22)(e) of the Act cannot be

invoked unless the Assessee itself is a shareholder of the

company who was lending money to him. (d) The decision of

the Co-ordinate Bench of this Tribunal, Mumbai Benches in the

case of The Bombay Oil Industries Limited Vs. Deputy

Commissioner of Income Tax in [2009] 28 SOT 383 (Mum.)

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wherein it is held that “Section 2(22)(e) of the Act enacts a

deeming fiction whereby the scope and ambit of the word

dividend has been enlarged to bring within its sweep certain

payments made by a company as per the situations enumerated

in the Section. Such a deeming fiction would not be given a

wider meaning that what it purports to do. The provisions

would necessarily be accorded strict interpretation and the

ambit of the fiction would not be pressed beyond its true limits.

The requisite condition for invoking Section 2(22)(e) of the Act

is that payment must be by way of loan or advances. Since

there is a clear distinction between the inter-corporate deposits,

viz. loans / advances, according to us the authorities below

were not right in treating the same as deemed dividend

u/s.2(22)(e) of the Act.”

7.3 Since, the Assessee is not a shareholder of QNEI, the

amount received from QNEI will not be taxable in the hands of

the Assessee as deemed dividend u/s.2(22)(e) of the Act and

common shareholding in two companies would not attract the

provisions of Section 2(22)(e) of the Act. In the light of the

above, we are of the opinion that the reassessment made by

the Assessing Officer stands null and void and the addition of

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Thus, the ground raised by the Assessee is allowed.

to challenge to the reopening of the assessment u/s.147

r.w.s.148 of the Act. As we have decided the issue of deemed

dividend u/s.2(22)(e) of the Act in favour of the Assessee, we

refrain ourselves from adjudicating the issue of reopening and

hence the same has become academic.

No.:700/CHNY/2020 is allowed partly. Order pronounced in the court on 22nd July, 2022 at Chennai. Sd/- Sd/- (महावीर िसंह ) (मनोज कुमार अ�वाल) (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा�य� /VICE PRESIDENT लेखा सद�य/ACCOUNTANT MEMBER

चे�ई/Chennai, �दनांक/Dated, the 22nd July, 2022 IA, Sr. PS आदेशकी�ितिलिपअ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु� (अपील)/CIT(A) 4. आयकरआयु�/CIT 5. िवभागीय�ितिनिध/DR 6. गाड"फाईल/GF