KHORAKIWALA HOLDINGS AND INVESTMENTS PVT. LTD.,MUMBAI vs. ASST CIT 14(2(1), MUMBAI

Per Rajesh Kumar, Accountant Member:

The above tilted cross appeals one by the assessee and the other by the Revenue have been preferred against the order dated 14.02.2019 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2013-14.

3 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. 7. erred in not adjudicating the ground on taxability of preference share application money received as unexplained cash credit under section 68 of the Act; 8. failed to appreciate that the appellant has discharged its obligation to prove i.e. identity of the party, genuineness of the transaction as well as creditworthiness of the party and .also source of the party; Disallowance under section 14A of the Act read with rule 8D of the Income- tax Rules, 1962 9. erred in not restricting the disallowance under section 14A of the Act to the amount of exempt dividend income received; 10. erred in not considering only investments earning exempt dividend for the purpose disallowance under section 14A of the Act; 11. erred in holding that the AO has correctly considered the gross interest expenditure while calculating the disallowance under section 14A of the Act as against the net interest expenditure. Any consequential relief, to which the Appellant may be entitled under the law in pursuance of the aforesaid grounds of appeal, or otherwise, may thus be granted. The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.” 3. The issue raised in ground No.1 is against the confirmation of addition by Ld. CIT(A) of Rs.90.00 crores as made by the AO in respect of preference share application money received from Banneret Trading Pvt. Ltd. (hereinafter referred to as BTPL) by treating the same as deemed dividend under section 2(22)(e) of the Act.

4 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. the details of share application money along with the necessary documents/evidences. In response to the notice, the assessee submitted the board resolution and financial statements of the entity from whom the assessee has received preference share application money. The AO observed from the financial statements of M/S BTPL that during A.Y. 2013-14 the said company sustained loss of Rs.29,529/-. The AO further observed from the balance sheet that the said entity M/s. BTPL has Rs.1,00,000/- as share capital,Rs.77,193/- as negative reserve and surpluses, long term borrowings Rs.736,28,23,727/- and current liabilities of Rs.19,28,090/-. The assessee has made long term advances and loans of Rs.755,28,12,730/- and is having cash balance of Rs.61,904/-. The AO observed that M/S BTPL has no net-worth and it has borrowed huge loans during the year out of which it has made advances. The AO, in order to verify the genuineness of the transactions, issued summon under section 131 of the Act to the Pr. Officer of M/s. BTPL to verify the fact that how a company which was not having any business, no revenue, negative net-worth has borrowed huge money and made advances out of that. The director of the said entity Mr. A Shiva Subramanian of M/s. BTPL appeared before the AO and his statement was recorded under section 131 of the Act. During the course of recording of the said statement the certain facts were noticed by the AO that Mr. A. Shiva Subramanian is an employee of M/s. Wockhardt Ltd. which has related concern party of the assessee company. The address of M/s. BTPL is same as that of the assessee and the affairs of the company are

5 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. being looked after by the same employees and in the same office. M/s. BTPL is involved in making strategic business investments, by making huge investments and advances amounting to more than Rs.700 crore without earning any revenue and thus the said company received funds from related parties either as interest free loans and as share application money. The said funds of more than Rs.700 crores were invested by M/s. BTPL to various group companies of M/s. Wockhardt Ltd. which inter alia included Rs.90.00 crores being given to the assessee as preference share application money. The assessee M/s. Khorakiwala Holdings and Investments Pvt. Ltd. is the ultimate holding company of M/s. BTPL as the assessee owns 91.31% equity shares in the capital of M/s. Carol Info Services Pvt. Ltd. hereinafter referred to as (CISPL) holding 99% of the equity share capital in M/s. BTPL. M/s. BTPL has borrowed money from M/s. CISPL which is holding 99% equity capital in M/s. BTPL. M/s. BTPL has paid as preference share application money to the assessee company without there being the sufficient authorised share capital in the assessee which was only Rs.16,60,800/- whereas the preference share application money received was huge of Rs.90.00 crores. The AO also recorded a finding that assessee has repaid loan of Rs.194,57,88,998/- during the year by using the amount raised as preference share application money from M/S BTPL. Finally, the AO issued show cause notice to the assessee dated 16.03.2016 calling upon the assessee as to why Rs.90.00 crores should not be considered as deemed dividend under section 2(22)(e) of the Act which was replied by the assessee vide letter

6 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. dated 28.03.2016. The AO after considering the submissions of the assessee came to conclusion that M/s. BTPL is just a paper company having no creditworthiness and the transactions of investment in preference share of assessee company is not genuine. The AO also noted that the all these companies including assessee belonged to M/s. Wockhardt group. The AO concluded that since M/s. CISPL has given loans of Rs.71.00 crores to M/s. BTPL who has further given the money as share application money to the assessee and thus virtual lending by M/s. CISPL to the assessee and therefore provisions of section 2(22)(e) of the Act has been clearly attracted. Similarly, The AO concluded that since M/s. Merind Ltd. has given share application money (Rs.19 crores) to M/s. BTPL who has further given the money as share application money to the assessee and without getting into the share holding pattern of M/s. Merind Ltd. concluded that the back to back transaction tantamounts to virtual lending by M/s. Merind Ltd. to the assessee and therefore provisions of section 2(22)(e) of the Act has been clearly attracted. The AO noted that in order to avoid the tax liability M/s. CISPL formed M/s. BTPL then transferred the money as share application money to the assessee. The AO noted that the M/s. CISPL instead of directly lending to the assessee lent the money through M/s. BTPL and thus the money was actually received by the assessee from its subsidiary M/s. CISPL. The AO rejected the contentions of the assessee on the ground that M/s. BTPL is just a paper company and has no creditworthiness and genuineness and established for transferring the money from one company to another within the group and money

7 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. advanced by the M/s. CISPL to the assessee indirectly through M/s. BTPL in order to avoid tax liability and therefore the same is covered under section 2(22)(e) of the Act. The AO observed that money is received by the assessee from M/s. BTPL but the money was actually advanced by M/s. CISPL and thus sham transaction through sham company. The AO, relying on the order of constitution Bench of the Hon’ble Supreme Court, held that tax planning may be legitimate which is within the frame work of law, however noticed that the present arrangement is a colourable device and can not be part of tax planning. Finally, the AO added the amount of Rs.90.00 crore received by the assessee as share application money as deemed dividend under section 2(22)(e) of the Act on the ground that assessee has substantial interest in M/s. CISPL and the said company is a company in which public are not substantially interested. The AO also noted that advances give by M/S. BTPL is not in the nature of advance for business purpose as the said company is just a paper company not having any creditworthiness and genuineness and therefore made a without prejudice addition under section 68 of the Act.

8 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. said preference share application money as deemed dividend under section 2(22}{e)."

"It may be noted that the preference share application money has been received from BTPL which is not a registered shareholder of KHIPL. KHIPL is the registered shareholder of Carol Info Services Limited {'CISL'), which in turn holds 100% of the share capital in BTPL. The source of preference share application money is as under: iii) Loan received from CISL - INR 71 crores iv) Preference share application money received from Merind Ltd. - INR 19 crores"

Prirna facie it is necessary to trace out the financial history of Carol arid the flow of funds from Carol to the Benneret and from Benneret to the assessee and others and from Merind to Benneret and from Benneret to Khorakiwala and look into reasons for such action on the part of Carol and Merind and then examine the applicability of section 2(22)(e} of the IT Act, 1961.

First of all the ownership pattern of shares in the companies during the year was as follows:

KHIL held 90.31 % of shares of Carol Info Services Limited Carol Info held 100% shares of Benneret Trading

It appears from the perusal of the annual accounts of Carol as on 31/03/2013 that 'Carol had made profit after tax of RSJ73.46 crores for the ear ended 31/03/2013 on account of sale of its main business and had share capital of Rs.35.43 crores and reserves and surplus of Rs.790.57 crores as on 31/03/2013. Carol also advanced Interest Free Loans totalling Rs.736.28 crores to 'Related Parties' and were made payable from the year 2017 in two instalments subject to amendment with mutual understanding' and these Interest Free Loans totalling Rs.736.28 crores were advanced to Benneret which passed further Board Resolution dated 27 July, 2012 for making investments in one or more trances in one or more trances in shares of following entities:

Palanpur Holdings Rs.600 Crores Khorakiwala Holdings (Assessee) Rs.300 Crores Dartmour Holdings Rs.600 Crores

Khorakiwala, the assessee received Rs.71 crores out of the above during the financial year as 'share application moneys of the company to be issued at a future date, as mutually agreed between both the companies' as per the Board Resolution dated 27 July, 2012 passed by the Board of Directors of Khorakiwala. It is worth mentioning here that shares were not issued till 31 March, 2013 by the Khorakiwala to Benneret which had a capital of only Rs.1 Lakh and employees of Khorakiwala as directors of the company. It also appears from the records that these funds of Rs.71 crores and Rs.19 crores were received from Benneret and Merind on the same date, that is, 28/07/2012. However, shares were not issued by the assessee to its share holder contributing Rs.71 crores and 19 crores till 31 March, 2013. It is also worth noting that the even though the directors of Carol and Merind were the family members of Khorakiwala family and directors of Benneret were two employees of Khorakiwala Group Of Companies, however they were all acting in tandem as is evident from date of board resolutions. It has been submitted by the assessee's CAs in letter dated 10 January, 2019 that 'Carol Info was holding 100% shares of Benneret, meaning thereby that the two employees of the company, that is, Mr. Subramanian and

9 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. Ms. Nagwekar were not holding any shares of Benneret and signed as directors of Benneret without being share holder of the company which is not permissible under the Companies Act, 1956 and or Companies Act, 2013. Anyhow, Benneret being a group company immediately appears to have invested most of these 'Interest Free Loans of Rs. 736. 28 crores as 'Share Application Moneys in the three Group Companies, including Rs.71 crores in Khorakiwala where it remained as outstanding as on the last date of the previous year, that is, 31 March 2013 similar to an unsecured loan.' It is highly probable that 'these shares were never issued till 31/03/2017 and these funds were shown as outstanding in share application money account of the respective parties, including Khorakiwala, since 'issuance of preference shares would have meant compliance with terms and conditions of the Companies Act 1956/2013 and SEBI relating to issuance of Preference Shares as is evident from the note number 8 to annual accounts of the assessee which reads as follows:

It is also worth mentioning here that even though 'Carol had long term borrowings of Rs.26.77 crores as on 31/03/2CU3 on which interest by way of finance costs was payable, Carol chose to not repay The outstanding long Term borrowings totally, but decided to 'Extend Interest Free Loans of Rs.736.28 crores to Benneret which were subsequently utilised by Benneret for making investment by way of preference share application moneys in three companies of The group.' It also appears from the Schedule -9 detailing current investments in the annual accounts for the F.Y 2012.-13 that 'assesses company - Khorakiwala Holdings And Investments Private Limited had invested an amount of Rs.180.83 crores in its wholly owned subsidiary Carol Info Services Limited as on 31 March, 2013.

Facts of the case of Merind Limited which is said to have invested Rs.19 crores as on 28/07/2012 are also similar. Merind Limited is a private limited group company which also had extended Interest Free Loan of Rs. 19 Crores to Benneret on 28 July, 2012 which is said to have transferred to the assessee as Share Application Moneys' and which was outstanding in the books of the assessee. Merind was a group investment company which had PAT of Rs.4.44 crores and free reserves of Rs.200.39 crores as on 31/03/2013 and transactions similar to the transactions made by Carol, Benneret and Khorakiwala. Here also the company Merind had reserves of nearly Rs.200.39 crores which were utilized for cither investing in associate and related companies as per the definition of 'related companies' under the Companies Act 1956-2013 and interest free funds were transferred during the year. It also appears from the annual accounts for the year ended 31 March 2013 that 'similar transactions were made in all the group companies in earlier assessment years as well and possibility of similar transactions having been made in future assessment years also cannot be ruled out. It is worth mentioning here that Merind Limited was a company in which public were not substantially interested as per the IT Act, 1961 and its 96.04 % shares were held by another group company Dartmour Holdings Private Limited as per the details mentioned in note number 19 (3) of notes to accounts of Merind Limited for the year ended 31 March 2013. These features are more or less common in the annual accounts of all the group companies whose copies of annual accounts are filed during appellate proceedings. Another feature which is noteworthy here is that 'loans running into crores of rupees were given either as interest free loans/advances and/or as 'Share

10 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. Application Moneys' and these loans and advances remained as such and interest was not charged and shares were not issued for long time and ultimately these share application moneys were returned to subscribers. It is also observed from the annual accounts that the assessee was not even authorized during the previous year relevant to AY 2013-14 to officially increase its authorized share capital during the year of Rs. 16,60,800/- and following note attached to the note number 6 of the annual accounts of Khorakiwala clearly reveal the facts of the case:

'The company has received share application money during the year, however, the company is in the process of increasing its authorised share capital and the quantum and terms and conditions of allotment shall be decided after increase of authorised share capital'

It is also observed from the annual accounts of Benneret and Merind for the year ended 31 March 2013 that the amounts of Rs.71 Crores and Rs.19 Crores were classified as 'Loans And Advances' by Benneret and Merind as on 31 March 2013 in their books of accounts. Even the assessee, that is, Khorakiwala had shown the total amount of Rs.90 crores as 'Current Liabilities'with the foregoing note attached.

In this connection note number 8 to annual accounts (paper book page 33) is report hereunder:-

Assessee has also been indulging in similar practices of advancing interest free funds as loans/advances towards 'Share Application Moneys' to other group subsidiary companies and has been bearing the burden of interest/finance costs and the quantum of 'Share Application Moneys' of Rs.107.34 crores and Rs.74.20 crores to Dartmour and Tridoss were reduced to Rs. NIL as on 31/03/2013, and these loans/advances running into crores of rupees were also classified as 'Share Application Moneys' for several years in the group companies to divert the legitimate source of income from several profit making group companies to loss making companies' and deprive revenue of its legitimate source of revenue as is the case with the assessee during the AY 2013-14. It also appears from the P 8s L Account and Balance Sheet of the assessee for previous year relevant to AY 2013-14 that assessee had borrowed amounts totalling Rs.429.32 crores as on first day of previous year, that is, 01/04/2012 which came down to Rs.23.61 crores as on last day of previous year, that is, 31/03/2013 which were utilized for making investments of Rs.296.56 crores and giving short term loans and advances of Rs.254.79 orores as on 01/04/2012 which were increased/reduced during the year to Rs.320.91 crores and Rs.29,69 crores respectively on which only Rs.00.95 crores was earned by way of interest and Rs.10.19 crores were expended as expenses thus making a commercial loss of Rs.9.23 crores. The financial accounts clearly show that company's own funds consisting of reserves of Rs.253.25 crores were used for investing in associate companies as follows:

Wockhardt Limited Rs. 59.45 crores ( Equity shares ) Coral Info Services Limited Rs. 180.83 crores (Equity shares }

11 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. Wockhardt Limited Rs. 80.00 crores (Preference Shares) Total Rs. 320.28 crores

This is only the final picture, assessee has been indulging in changing its modes of deploying its funds, from investments to loans and advances and from advances and loans to investments, including giving funds by way of share application moneys.

Similar are the facts in the case of Merind Limited which is said to. have transferred Rs.19 crores as share application moneys to the assessee through the medium of Benneret to assessee on the same date, that is, 28 July 2012. And these amounts were shown and classified as loans and advances' by Merind in its books of accounts even till the last day of the financial year, that is 31/03/2013 since assessee did not have the legal mandate to raise 'preference share capital' of either 'Rs.71 crores from Benneret and Rs.19 crores from Merind.' Thus the amount of Rs.19 crores received from Merind through Benneret was also nothing but an ^unsecured interest free loan and advance'. M/s. Benneret was merely a conduit for transferring funds received from Merind to pass it on immediately to the assessee as 'interest free loan and advance' and show it as loans and advance in the books of Benneret and 'share application moneys* in the books of the assessee. It is probable that these so called preference shares were never issued by the assessee and funds were subsequently returned to Benenret and Benenret may have returned these funds to respective companies, that is Rs.71 crores to Carol and Rs.19 crores to Merind immediately.

It becomes quite clear from the foregoing that 'the amount of Rs.71 crores received from Benneret was nothing but an unsecured loan classified as 'share application moneys' for accounting purposes since assessee did not have the mandate under the Companies Act 1956/2013 to raise the 'preference share capital' during the year since its authorized share capital by way of preference share capital and showing the amounts as 'share application moneys' was an afterthought to get over and avoid provisions of section 2(22)(e) of the IT ACT 1961, As such, the receipt of Rs.71 crores by way of so called share application moneys was nothing but an unsecured interest free loan/advance by Carol Info, a Subsidiary of the assessee, that is, Khorakiwala through the medium of Benneret to the assessee, that is, Khorakiwala and it squarely falls within the provisions of section 2(22)(e) of the IT Act 1961. Prima facie a fagade of making investments by way of 'share application money' was created during July 2012 to transfer funds from Carol Info and other group companies to three group companies to utilize the free reserves running into hundreds of crores of rupees of Carol Info and Merind to associate companies to deprive Carol and Merind of its legitimate source of income by way of interest and dividends to loss making companies like, the assessee and other two group companies Palanpur and Dartmour.

Assessee's objection to the treatment of the loan/advance/share application moneys given by Benneret to Khorakiwala-assessee being treated as 'deemed dividend' is under the first part of the section 2(22)(e) of the IT Act 1961 which is squarely covered by the provisions of the section 2(22)(e) of the IT Act 1961 for the simple reason that ' payment of Rs. 90 crores made by Benneret to Khorakiwala - the assessee who holds 90.4% of shares of Carol Info which had given an interest free loan of Rs. 71 crores of Benneret, is nothing but a case of straight transfer of funds occurring on the same day, that is, 27/28 July 2012 from Carol to Benneret by loan, from Benneret to Khorakiwala as loan /advance /share application moneys and from Khorakiwala to Carol by way of investment in shares. Thus, interest free funds by way of loan/advance from Carol have gone back to Carol as share investments and thus the entire circle is completed. Thus this entire exercise is nothing but a device and a fagade created by the Khorakiwala Group Of Companies to circumvent the

12 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. provisions of section 2(22)(e) of the IT Act 1961 not only in the case of this company but also in other group of companies, as is evident from the Board resolution of Benneret which was nothing but a conduit company for transfer of interest free funds by way of loans/advances running into crores of rupees to other group companies which needed funds to reduce losses. Assessee has primarily objected to the invocation of this clause on the ground that the 'funds have not been given to the share holder and primarily these payments were towards share application moneys and hence do not fall within the category of loans/advances as mandated by the provisions of section 2(22)(e) of the IT Act 1961 and has submitted which has been reproduced in the appellant's submissions under this ground.

Prima facie it would appear that ' the assessee has not made any loan/advance to the shareholder, however, all the transactions made by the assessee on the same day within the group companies clearly show a chain of circular transactions whereby funds of one company, that is, Carol which had accumulated reserves of crores of rupees flowed by mode of 'circular transactions' to its holding company, Khorakiwala Holdings which was incurring losses, and this is nothing but a facade and a device to circumvent the provisions of section 2(22)(e) of the IT Act 1961 and notwithstanding various decisions quoted by the assessee in its letters dated 10/1/2019 decision of Supreme Court in the case of McDonald & Co Limited v/s. CTO— 1985/22/Taxrnan/ 11 will squarely apply to the facts of the case. This is further confirmed by the fact that entire share holding in the Khorakiwala Group Of Companies was taken up to comply with the SEBI guidelines and desire of the group directors to exercise control over the restructured companies. And similar type of transactions were undertaken in all the connected/associate group companies in a planned manner knowingly. Therefore what has to be seen is not the form but the substance and if the corporate veil is pierced, it will appear that funds were transferred from companies with 'accumulated profits' within its meaning under section 2(22)(e) of the IT ACT 1961 to the group/associate companies in the Khorakiwala Group to which were making/incurring commercial losses. This had two fold effect, one to transfer moneys by way of interest free loans/advances/share application moneys from cash rich companies of the group to reduce 'generation of income chargeable to tax' and hence reduce incidence of income tax on the cash rich company and generate income for the 'loss making company' to reduce its losses by either paying back its debts and hence reduce its expenses and/or invest interest free funds in revenue generating investments to generate income and absorb losses commercially and under the IT Act 1961 to reduce and avoid payment of income tax. Therefore, the entire facts of the case and other group companies clearly show that 'the entire restructuring exercise had only two main purposes, one to restructure the share holding in a way to retain control over the group companies and second to reduce and avoid payment of taxes under the specific provisions of the IT Act 1961'. Therefore, Supreme Court decision in the case McDonald & Co Limited v/s. CTO— 1985/22/Taxman/11 is squarely applicable to the facts of the case. In nutshell, contention raised by the assessee in the letter that 'the decisions quoted by the AO do not apply to the facts of their case, is rejected in facts and in law' and held that the provisions of section 2(22)(e) of the IT Act 1961 were applicable to the assessee's case and hence the action of the AO in this regard is upheld.

Thus in nutshell, what has happened is that Benneret a wholly owned subsidiary of Carol gave a loan/advance of Rs.90 crores under the disguise of share application moneys to the assessee, Khorakiwala, who was holding 90.41 % shares of Carol and in which Kroakiwala had invested an amount of Rs.180.83 crores as on 31 March 2013. There are three sub clauses of section 2(22)(e) of the IT Act 1961 and the last and third sub clause reads as follows:

13 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd.

2(22)(e): Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a party of the assets of the company or otherwise) [made after the 31?* day of May, 1987, by way of advance or loan to a shareholder, 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 partner and 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 is wither case possesses accumulated profits;

but "dividend" does not include-

(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets;

(ii) any advance loan made to 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.

(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;

(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).

Thus it becomes crystal clear from the reading of the third part of the clause of section 2(22)(e) of the IT ACT 1961 that 'any payment (Rs.90 crores) by any such company (Benneret) on behalf, or for the individual benefit, of any such shareholder (Carol Info— Total investment of Khorakiwala as on 31/3/2013 in Carol by way of shares-Rs. 180.83 crores) ....' is nothing but 'a deemed dividend under section 2(22)(e) of the IT Act, 1961 since funds of Rs.90 crores of Benneret have flowed back by way of loan/advance/share application moneys to the shareholder, Carol Info through the medium of its holding company, Khorakiwala by way of investment of Rs.180.83 crores in carol info services limited". This is purely based on facts of the case and even if the payment of Rs. 90 crores treated as loan/advance and/or share application moneys, the words any payment mentioned in third part of the clause of section 2(22)(e) of the IT Act 1961 will squarely fall within the ambit of section 2(22)(e) of the IT Act 1961 and hence the 'payment of Rs.90 crores by Benneret to Khorakiwala during F.Y.2012-13 relevant to A.Y.2013-14 is nothing but a deemed dividend and chargeable to'tax. AO has dealt with only first part of the sub clause whereas the third sub clause which is very wide, squarely applies to the facts of the case. Therefore it is held that 'the provisions of section 2(22)(e) of the IT Act, 1961 were squarely applicable under the third part of the section 2(22)(e) of the IT Act, 1961 and hence action of the AO in treating the payment of Rs.90 crores by Benneret to the assessee as 'deemed dividend' under the provisions of section 2(22)(e) of the IT Act, 1961 is upheld in facts of the case and in law since 'these provisions are squarely applicable. In nutshell, AO's

14 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. action to treat the payment of Rs.90 crores by Benneret to its as 'deemed dividend' is upheld and confirmed.

15 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. money and also submitted the balance sheet as on 31.03.2015, confirmation and computation of income of M/s. BTPL. The Ld. A.R. submitted that in the balance sheet and notes to accounts of M/s. BTPL, it had declared the amount as paid to assessee as preference share application money. The Ld. A.R. submitted that similar share application money was also paid to other entities in the group and same were duly disclosed in the notes to accounts in the annual audited financial statements of M/s. BTPL. The Ld. A.R. submitted that on 07.03.2016 M/s. BTPL replied to notice issued by the AO under section 133(6) of the Act and filed the board resolution for making investments in the preference shares of assessee company beside furnishing memorandum of article association. The Ld. A.R. submitted that vide letter dated 10.03.2016 the assessee filed copies of ITR, computation of income, annual accounts and tax audited report of M/s. CISPL. The Ld. A.R. submitted that the assessee has used the said money for repaying the entire loan of Rs.194,57,88,998/- taken from M/s. CISPL in F.Y. 2008-09 and therefore the money received by the assessee in the form of preference share application money from M/s. BTPL can not be taxed under section 2(22)(e) of the Act. In defence of his arguments, the Ld. A.R. relied on the following decisions: 1. CIT v. Madhur Housing & Development Co. Civil Appeal No.3961 of 2013 2. CIT vs. Jignesh P Shah (2015) 372 ITR 392 (Bom.) (HC) 3. Pr. CIT vs. Rajeev Chandrashekhar (2017) 397 ITR 263 (Kar.) (HC) 4. CIT vs. Pravin Bhimshi Chheda (2015) 228 Taxman 340 (Bom)(HC)(MAG) 7. The ld counsel of the assessee also relied on the decision of jurisdictional High Court in the case of HDFC Bank Ltd Vs ACIT

16 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. (2019)410 ITR 247 (Bom) to prove his point that it is incorrect to regard a parent company/shareholder as beneficial owner of the assets held by the subsidiary company since the wholly owned subsidiary is a separate legal entity though the decision was rendered in the context of provisions of section 40A(2) of the Act. The Ld. A.R. submitted that even if the application money received from M/s. BTPL was treated as loan or advance, even in that case the same cannot be considered as deemed dividend in the hands of the assessee, in absence of any direct share holding of assessee in M/s. BTPL.

17 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. 210 Taxman 151. The Ld. A.R. submitted that in the above decision it has been held that money received as share application money was not in the nature of loans and advances for the purpose of invoking provisions of section 2(22)(e) of the Act.

18 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. loans and advances for the year ended 31.03.2012 were Rs.664 crores and Rs.507 crores respectively representing 77% of the total assets. The Ld. A.R., therefore, submitted that providing loan and advances to the group company is one of the business activities of M/s. CISPL and therefore lending of money is a substantial part of the business of M/s. CISPL. The Ld. A.R. while drawing our attention to clause (ii) of section 2(22)(e) of the Act submitted that it excludes from the scope of deemed dividend any advance or loan made to a shareholder or the said concerns by a company in the ordinary course of its business. The Ld. A.R. submitted that since the lending of money is being substantial part of business of M/s. CISPL as stated above, even if it is considered that loan was purportedly to be advanced by M/s. CISPL to the assessee, the same would fall under exception provided by clause (ii) of section 2(22)(e) of the Act and therefore the same should not be subject to tax as deemed dividend in the hands of the assessee. The Ld. A.R. further submitted that M/s. BTPL has advanced to various group companies the share application money to the extent of Rs.755.00 crores which represented almost the entire business assets of M/s. BTPL. Thus if the AO were to treat the preference share application money by the assessee from M/s. BTPL as a loan even then the provisions of section 2(22)(e) do not hold good as in that case also M/s. BTPL ought to be treated as a company involved in substantial lending activity and therefore the provisions of section 2(22)(e) of the Act can not be invoked to the funds advanced by M/s. BTPL to the assessee. In defence of his arguments, the Ld. A.R. relied on following decisions:

19 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. CIT vs. Jayant H. Modi (2015) 232 Taxman 337 (Bom.) (HC) i) ii) ITO v. Ajay Dilkhush Sarupriya (2015) 70 SOT 449 (Mum.)(Trib.)- iii) CIT v Parle Plastics Ltd. (2011) 332 ITR 63 (Bom.)(HC) iv) Ravi Agarwal v ACIT (2016) 287 CTR 581 (A11.)(HC)

20 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. thereof i.e. Rs.90.00 crores. The Ld. A.R. submitted that there is commercial exigencies and expediency for the said transaction and this transaction was executed by way of book entries only but actual money flowed from one party to another and the said transaction does not involve any infringement of law. The Ld. A.R. argued that the transactions which are carried out within the framework of law can not be termed as sham transactions just because there is a lower outflow of taxes. The Ld. A.R. placed reliance on the decision of UOI vs. Azadi Bachao Andolan & Anr. (2003) 263 ITR 706 (SC) and the Ld. A.R. also referred to Vodafone International Holdings vs. UOI (2012) 341 ITR 1 SC wherein the Hon’ble Supreme Court has explained the correct interpretation of Mc Dowell & Company Limited vs. Commercial Tax Officer (1985) 154 ITR 148 SC that legitimate tax planning can not be considered as sham. The Ld. A.R. also relied on a series of other decisions namely; i) CIT vs. Hede Consultancy Co. (P.) Ltd. (2015) 231 Taxman 421 (Bom)(HC) ii) Coromandel Cables Ltd. vs. ACIT (2016) 71 taxmann.com 346 (Chennai) (Trib.) iii) CIT vs. Mehta (P) Ltd. (2008) 174 Taxman 104 (Bom) (HC)/ (2008) 220 CTR 148 (Bom)(C) iv) Porrits and Spencer (Asia) Ltd. vs. CIT (2010) 329 itr 222 (P&H) v) F.E. Dinshaw Limited Vs. CIT (1959) 36 ITR 114 (Bom.) (HC) vi) CIT vs. Walfort Shares & Share Brokers (P) Ltd (2010) 326 ITR 1 (SC)

The Ld. A.R. finally prayed before the Bench that in view of these foregoing arguments and the ratio laid down by various courts the addition of Rs.90 crores as confirmed by Ld. CIT(A) is

21 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. bad in law and may kindly be deleted as the provisions of section 2(22)(e) of the Act are not applicable as (i) the preference share application money is not in the nature of loan, (ii) M/s. BTPL has no accumulated profit and M/s. CISPL and M/s. BTPL are in the business of borrowing and advancing to group companies and (iii) the transactions are not sham transactions as has been held by the AO.

22 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. submitted that admittedly M/s. BTPL has no accumulated profit but the company from which the funds were flowing i.e. M/s. CISPL has huge accumulated profit and therefore for the purpose of invoking section 2(22)(e) of the Act, the accumulated profit of the M/s. CISPL has to be seen and not of M/s. BTPL as the transaction of investment into the assessee is being looked at from the angle of funds invested by M/s. CISPL through M/s. BTPL in the assessee company. The Ld. D.R. also submitted that though the M/s. BTPL has raised huge amount of loans and advanced the same to the other group companies but the fact remains that the said company has no credibility, no net worth and no profits and the whole game plan was to circumvent the tax laws and therefore the addition of Rs.90 crores needs to be sustained. The Ld. D.R. also submitted that the transaction entered into by the assessee with M/s. BTPL by way of accepting the preference share application money are sham transactions. The Ld. D.R. while distinguishing the decision of the Hon’ble Supreme Court in the case of CIT vs. Madhur Housing and Development Company (supra) submitted that it is a very brief judgment whereby the decision of Hon’ble Delhi High Court in the case of CIT vs. Ankittech Pvt. Ltd. in ITA No.462 of 2009 was affirmed. The Ld. D.R. submitted that the facts are clearly different in that case as the entity in whose hands the addition of deemed dividend was made by the AO was a company A which has received certain loans from company ‘B’. The substantial shareholders of company B were were certain individuals C who were also substantial shareholders in company A .In such circumstances Hon’ble Court held that

23 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. addition of deemed dividend is liable to be made in the hands of those individuals C and not in the hands of company ‘A’. However, in the present case, the contours of transactions are entirely different. The AO has clearly brought out that substance of the transaction is that of advancing money by M/s. CISPL to the assessee via indirect root wherein the assessee is a shareholder. The Ld. D.R. submitted that the direct transfer of money by M/s. CISPL to the assessee would have covered the transaction directly under the provisions of section 2(22)(e) of the Act and therefore the assessee used a colourable device of introducing a paper company in the middle i.e. M/s. BTPL wherein the assessee was not having any shareholding. The Ld. D.R. submitted that money was first transferred by M/s. CISPL to M/s. BTPL and then to the assessee shows that the whole transaction was laid out in such a manner to circumvent the provisions of section 2(22)(e) of the Act. The Ld. D.R. submitted that the M/s. BTPL was a paper company and as is apparent from the fact that the said company is not having any net worth or business activity during the year and it has only borrowed money from the group companies and advanced the same intra group. The Ld. D.R. referred to the statement recorded under section 131 of the Act of Mr. A Shiva Subramanian, director of M/s. BTPL who submitted in reply to question No.14-18 that M/s. BTPL was not into any active business and was only used to transfer the funds from M/s. CISPL to other group companies. Therefore, in the present case, the facts are clearly distinguishable wherein the AO has made addition in the hands of the assessee who is shareholder of M/s. CISPL who has

24 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. actually advanced the money through M/s. BTPL. In view of these facts, the Ld. D.R. submitted that the arguments of the assessee deserved to be rejected. The Ld. D.R. submitted that Ld. Counsel of the assessee has also relied on some case laws of various High Courts and Tribunals, however, they not applicable to the facts of the present case. The Ld. D.R. submitted that the decisions referred to by the Ld. A.R. in the case of HDFC Bank Ltd vs. ACIT (supra) pertains to section 40A(2) of the Act. In the case of Pr. CIT vs. Rajeev Chandrashekhar (supra) the shareholdings pattern was different whereas in the case of CIT vs. Pravin Bhimshi Chheda (supra) the nature of transaction is distinguishable and therefore not applicable to the present case. The Ld. D.R. further argued that the other contentions raised by the assessee qua the share application money received from M/s. BTPL that the said company not having any accumulated profit and that funds advanced in the ordinary course of business are accordingly liable to be rejected, in view of the aforesaid facts that the whole transaction was planned to circumvent the provisions of section 2(22)(e) of the Act. The Ld. D.R. while rebutting the Ld. Counsel’s arguments submitted that this was a case of circuit transactions whereby the money belonging to M/s. CISPL was given to the assessee through M/s. BTPL and thus the money indirectly belonged to the company wherein the assessee has substantial shareholding to the tune of 90.31%. The Ld. D.R. also submitted that in this case though the intermediary company M/s. BTPL does not have any accumulated profit but the company whose money was routed i.e. M/s. CISPL was having enough accumulated profit and in

25 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. such a scenario it is the onus of the department to lift the corporate veil. Therefore, the order of Ld. CIT(A) on this issue may kindly be affirmed. The Ld. D.R. relied on Pee Aar Securities Ltd. vs. DCIT in ITA No.4978/Delhi/2014 A.Y. 2005-06 order dated 23.08.2018 however after carefully perusing the said order, we find that the said order is rendered on different facts and therefore not applicable to this case.

26 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. the AO to verify the said share application money by submitting and furnishing the copy of board resolution authorizi1111ng the making of investments in the shares of assessee besides filing copy of memorandum and articles of association. During the year the assessee has repaid the entire loan of Rs.194,57,88,998/- taken from M/s. CISPL in A.Y. 2008-09 and this Rs.90 crore was also utilized in the repayment of loan as stated above. The AO treated the preference share application money received by the assessee of Rs.90.00 crores as deemed dividend under section 2(22)(e) of the Act on the ground that the said money was in fact received from M/s. CISPL in which the assessee holds 90.31% equity shares through intermediary company M/s. BTPL in which M/s. CISPL holds 99% of the equity share capital. According to the AO the said amount received in the form of share application money is directly covered under the provisions of section 2(22)(e) of the Act as the money came from M/s. CISPL to M/s. BTPL and then to the assessee. The Ld. CIT(A) also upheld the order of AO on this issue by holding that the money in fact belonged to the entity in which the assessee is registered as well as beneficial shareholder to the tune of 90.31% and thus the advancing/investing money through M/s. BTPL is only an arrangement entered into by the assessee to circumvent the provisions of section 2(22)(e) of the Act. Undisputedly and factually, the assessee is not a registered shareholder of M/s. BTPL and therefore the condition as envisaged in the provisions of section 2(22)(e) of the Act are not satisfied. Further, the assessee is also not a beneficial shareholder in M/s. BTPL and therefore there is a merit in the

27 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. contentions of the assessee that the preference share application money received by the assessee can not be treated as deemed dividend in the hands of the assessee as the basic condition as envisaged by section 2(22)(e) of the Act is not satisfied. In our opinion, the assessee has to be registered as well as beneficial shareholder of the lender company in order to attract the provisions of section 2(22)(e) of the Act as held by the Hon’ble Apex Court in the case of CIT vs. Madhur Housing and Development Company civil appeal No.3961 of 2013. The case of the assessee is also covered by a series of judgments which are discussed in the following paras.

a)In the case of CIT vs. Jignesh P. Shah (supra) the Hon’ble Bombay High Court has held that the individual assessee is not a shareholder of M/s. NS Fincon Pvt. Ltd. from whom the assessee has received the loan. Another entity M/s. Law Financial Services Pvt. Ltd. had advanced money to M/s. NS Fincon Pvt. Ltd. The Hon’ble High Court has held that the provisions of section 2(22)(e) of the Act are not applicable. b)In the case of Pr. CIT vs. Rajeev Chandrashekhar (supra) the jurisdictional High Court has held that provisions of section 2(22)(e) of the Act are not applicable where the assessee is not a shareholder in the lender company. In this case the assessee received advance from M/S Jupiter Capital Pvt. Ltd. The assessee was a shareholder with 95% shareholdings in M/S Vectra Holdings Pvt. Ltd. which in turns was holding 99.90% in Jupiter Capital Pvt. Ltd. The

28 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. addition was made by the AO u/s 2(22)(e) of the Act in the assessee hand on the ground that assessee is beneficiary of dividend in Vectra Holdings Pvt. Ltd. which in turn is beneficiary of dividend from Jupiter Capital Pvt. Ltd. and he can be held beneficial or actual owner of the shares of Jupiter Capital Pvt. Ltd. The tribunal held that the assessee is not the shareholder in the lender company and therefore provisions of section 2(22)(e) are not applicable which was affirmed by the Hon’ble High Court.

c)In the case of CIT vs. Pravin Bhimshi Chheda (supra) Hon’ble Bombay High Court has held that circuitous transfer of funds to shareholders was not deemed dividend if company got back its funds on the same day. It was held that provisions of section 2(22)(e) of the Act has to be construed strictly.

d). Similarly, the Hon’ble Bombay High Court in the case of HDFC vs. ACIT (supra) has held that the beneficial ownership does not include indirect shareholdings though the judgment was rendered in the context of provisions of section 40A(2) of the Act. The question before the Hon’ble Bombay High Court was whether even the indirect shareholding is to be considered for the purpose of determining the substantial interest for the purpose of section 40A(2)(b) of the Act.

29 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. not in the nature of loans and advances. The case of the assessee is squarely covered by the decisions of the various High Courts. a) In the case of CIT vs. Vikas Oberoi (supra) the Hon’ble Bombay High Court has held that share application money received was not loans or advances for the purposes of invoking section 2(22)(e) of the Act. In the said decision, the Hon’ble Bombay High Court has upheld the ratio laid down by the Bombay Tribunal in the case of ITO vs. Direct Information Pvt. Ltd. 33 taxman.com 386 (Mumbai) and ITO vs. Subhmangal Credit Capital Pvt. Ltd. ITA No.7238(Mum). b) Similarly the Delhi Tribunal in the case of CIT vs. Max Exports Pvt. Ltd. (supra) has held that share application money can not be treated as loan or advance within the meaning of section 2(22)(e) of the Act.

We are, therefore, not in agreement with the decision of the lower authorities on this issue and hold that the preference share application money received by the assessee from M/s. BTPL is outside purview of section 2(22)(e) of the Act and consequently has to be deleted. The case of the assessee is also supported by the decision of Hon’ble Bombay High Court in the case of Director of Income Tax (International Taxation) vs. Besix Kier Dhabolese (supra) wherein Hon’ble Bombay High Court has held that in absence of any law the equity transactions can not be recharacterised as debt by the Income Tax Department and

30 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. consequently the provisions of section 2(22)(e) of the Act could not be held to be validly invoked in the case of the assessee.

31 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. parties meaning thereby that 82% of the total assets of M/s. CISPL were used for advancing loans to the related parties. The corresponding figures of assets and loans and advances for the year ended 31.03.2012 were Rs.664 crores and Rs.507 crores respectively representing 76% of the total assets. Thus it is clear from the above that providing loans and advances to group companies is one of the business activities of M/s. CISPL. We note that lending is a substantial part of business activity of M/s. CISPL which is specifically excluded from the scope of deemed dividend under clause (ii) to section 2(22)(e) of the Act . Therefore, even if the money/loan is presumed to be advanced advanced by M/s. CISPL to the assessee and not as share application money by M/s. BTPL even then the said amount can not be added in the hands of the assessee as deemed dividend under section 2(22)(e) of the Act on the ground that lending of money being a substantial part of business activity of the M/s. CISPL. We further note that M/s. BTPL has invested share application money in various companies to the extent of Rs.755.00 crores which is almost the entire business assets of M/s. BTPL, In such a scenario if we presume the preference share application money received by the assessee from M/s. BTPL as loan, even then the said amount can not be added as deemed dividend under section 2(22)(e) of the Act as the said company is involved in substantial lending activity and thus the provisions of section 2(22)(e) of the Act are not attracted to the funds advanced by the M/s. BTPL to assessee. The case of the assessee is squarely covered by the decision of the Hon’ble Bombay High Court in the case of CIT vs. Jayant H. Modi

32 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. (supra). In this case the assessee has received loan from one M/s. JMC Securities Pvt. Ltd. which was engaged in the business of share and stock brokers. The Hon’ble Bombay High Court has held that maximum amount of loan advanced by the company during the year under consideration was to the tune of Rs.95,45,000/- which constitute 33% of the total funds available with the said company and thus upheld the order of Tribunal wherein the Tribunal has concluded that lending money is a substantial part of business of M/s. JMC Securities Pvt. Ltd. and upheld the order of the Tribunal wherein the Tribunal deleted the addition of deemed dividend. Similar ratio has been laid down in other decision namely ITO v. Ajay Dilkhush Sarupriya (supra), CIT vs. Parle Plastics Ltd. (Bombay HC) (supra) and Ravi Agarwal v ACIT (Allhabad HC) (supra). Therefore, even on this score the order passed by the Ld. CIT(A) can not be sustained.

33 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. accounts of M/S BPTL. The source of money is clearly vouched and verified as M/s. BTPL has received Rs.71.00 crore from M/s. CISPL and Rs.19.00 crore from M/s. Merind Ltd. We also do not find any merit in the arguments of the Revenue that M/s. BTPL is a sham company as the said company specifically formed for the purpose of borrowing and advancing money from group companies and was incorporated in 2008 and not only for the purpose of this particular transaction. We also note that during the year, the assessee has repaid the loans to the tune of Rs.406 crores approximately and thus Rs.90.00 crores received from M/s. BTPL is a small portion of funds utilised by the assessee to repay the loans and we find commercial expediency and commercial consideration in entering into various transactions. Moreover, the transactions by the group companies are not book entries but followed by actual transfer of funds involving no infringement of law. In our opinion, the transaction of the assessee is carried out within the framework of law and therefore can not be said to be sham transaction because there is a lower outflow of taxes. The case of the assessee is supported by the decision of UOI vs. Ajadi Bacho Andolan & Ors.(supra) wherein the department has argued that intervening company incorporated in Mauritius company was a shell/sham company incorporated to save taxes. The Hon’ble Supreme Court has explained the correct interpretation of Mc Dowell and Co. Ltd. vs. CTO (supra) that legitimate tax planning can not be considered as sham by holding and observing as under: “If the Court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the Court might be justified in

34 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. overlooking the intermediate steps, but it would not be permissible for the Court to treat the intervening legal steps as non-est based upon some hypothetical assessment of the ‘real motive’ of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o’- the-wisp.”

Similarly, in the case of Vodafone International Holding BV vs. UOI(supra), the Hon’ble Court has explained the correct interpretation of Mc Dowell & Co. Ltd. (supra) that legitimate tax planning can not be considered as sham. In the case of CIT vs. Head Day Consultancy Pvt. Ltd. (supra) the Hon’ble Bombay High Court has held that where the share of a sister concern was sold at a loss to reduce the profit on sales of stock exchange, the transactions were not a legitimate as the transactions were within the four corner of law and were not to be held as sham. Similarly, in the case of Porrits and Spencer (Asia) Ltd. vs. CIT (supra) the court has held that once the transaction is held to be genuine merely because it has been entered into with a motive to avoid tax, it would not become a colourable devise and consequently earned any disqualification. In the case of CIT vs. Wallport Shares and Share Brokers Pvt. Ltd. (supra) the Hon’ble Supreme Court has held that where the assessee was purchasing dividend bearing unit and selling them at a loss after receiving a dividend, the same can not be held as a sham transaction by observing and holding as under: “Even assuming that the transaction was pre-planned there is nothing to” impeach the genuineness of the transaction. With regard to the ruling in Mc Dowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC), it may be stated that in the later decision of this Court in Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 it has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of this Court in McDowell & Co. Ltd.’s case (supra).”

35 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. In view of the above said facts and the ratio laid down by the various High Courts and Apex Court, we are not in agreement with the conclusion of the lower authorities that the transaction by M/s. BTPL to assessee was sham. Therefore, considering the facts and circumstances as discussed above in the light of ratio laid down in the various decisions as discussed hereinabove, we are inclined to hold that the provisions of section 2(22)(e) of the Act are not applicable in the present case and accordingly, we set aside the order of Ld. CIT(A) and direct the AO to delete the addition made under section 2(22)(e) of the Act. The ground no. 1 is allowed.

36 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. of proving these three ingredients as envisaged by provisions of section 68 of the Act has not been discharged. 20. The Ld. CIT(A) did not adjudicate the said ground on the plea that the issue has been decided against the assessee on the main ground. The ld. CIT(A) observed and held as under: “With regard to ground No.6 of the appellant wherein it has objected to the AO’s alternative view that the amount of Rs.90 crores was received from the above mentioned parties constitutes unexplained cash credit u/s 68 of the Act, it is held that the undersigned has decided the ground of appeal no. 5 against the appellant and hence this ground of appeal no. 6 has not been adjudicated. It is to be mentioned here that during the appellate proceedings the appellant's AR also filed certain documents which constitute additional evidence in relation to ground no,6 raised has been considered but in view of the decision on round no. 5 above, these documents have now become not relevant. In view of this, considering the facts and circumstances of the case this ground of appeal is not adjudicated.”

37 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. genuine. As regards creditworthiness of the investor i.e. M/s. BTPL, we have no doubt as the money is advanced out of borrowed fund from M/s. CISPL and M/s. Merind Ltd. Therefore, in our opinion, all these three ingredients of section 68 are fully satisfied. Moreover, the money has transferred through banking channel and thus all the evidences are on record. The case of the assessee is also supported by the decision of the Apex Court in the case of CIT vs. Lovely Exports Pvt. Ltd. 216 CTR 195(SC) wherein the Hon’ble Court observed that once the assessee has given names and identity of the shareholders, the onus upon it gets discharged and no addition can be made in the hands of the assessee and the onus shifts to the department and if the department thought it to be appropriate, the Act permitted the tax department to proceed against such shareholder and even to reopen the individual if necessary in accordance with statutory powers under section 147 of the Act. Similar ratio has been laid down in PCIT vs. Parth Enterprises by the Hon’ble Bombay High Court in ITA No.786 of 2016 dated 11.12.2018. Therefore, we are of the considered opinion that share application money amounting to Rs.90.00 crores received from M/s. BTPL can not be treated as income of the assessee under section 68 of the Act. In the case of PCIT vs. Veedhata Tower Pvt. Ltd. (2018) 403 ITR 415 the Hon’ble Bombay High Court has held that source of source is not required to be proved. Similarly in the case of CIT vs. Orchid Industries Pvt. Ltd. (2017) 397 ITR 136 Hon’ble Bombay High Court has held that share application money can not be treated as cash credit. Considering the fact of the case in the

38 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. light of various decisions as discussed hereinabove we are inclined to hold that the preference share application money of Rs.90.00 crores received by the assessee can not be brought to tax as unexplained credit under section 68 of the Act. Accordingly the ground no.2 is allowed.

39 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. However, the AO rejected the working of the assessee and deworked the disallowance under section 14A at Rs.8,09,27,595/-. The AO, therefore, made a net addition of Rs.1,70,51,001/- after allowing the deduction of suo-moto disallowance.

Secondly the disallowance cannot exceed the exempt income of Rs. 7,02,745/-. We find merits in the contentions of the assessee the issue is squarely covered the decision of the Bombay High Court in the case of Pr CIT Vs Ballarpur Industries Ltd. ITA No. 51 of 2016 vide order dated 13.10.2016 , Pr. CIT Vs Caraf Builders & Construction (P) Ltd. (2019)261Taxman

40 ITA No.2177/M/2019 ITA No.3348/M/2019 M/s. Khorakiwala Holdings and Investments Pvt. Ltd. 47(Delhi) which has considered the decision of Hon’ble Apex Court in the case of Maxopp Investments Ltd Vs CIT(2018)259 Taxman314 SC. After considering the ratio in the various decisions as discussed above we are inclined to set aside the order of ld. CIT(A) on this issue and direct the AO to restrict the disallowance to the amount of exempt income at Rs. 7,02,745/-.

The ground no. 3 is allowed and revenue appeal is dismissed.

In result the appeal of the assessee is allowed and appeal of the revenue is dismissed.

Order pronounced in the open court on 29.01.2020.

Sd/- Sd/- (Amarjit Singh) (Rajesh Kumar) JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai, Dated: 29.01.2020. * Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [ By Order

Dy/Asstt. Registrar, ITAT, Mumbai.