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Income Tax Appellate Tribunal, MUMBAI BENCH “A” MUMBAI
Before: SHRI D.T. GARASIA & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
The captioned appeals filed by the assessee are directed against the order of the Commissioner of Income Tax (Appeals)-19, [in short ‘CIT(A)’] Mumbai and arise out of the assessment completed for u/s 143(3) r.w.s. 147 of the Income Tax Act 1961 (the ‘Act’). As common issues are involved, we are proceeding to dispose them off through a consolidated order for the sake of convenience.
M/s Apurva Developers 2 7766/Mum/2 Assessment Year: 2005-06 2. The 1st ground raised by the appellant in this appeal is against the order of the Ld. CIT(A) confirming the disallowance of interest on secured loan of Rs.33,53,450/- and deducting the same from capital work-in-progress by the Assessing Officer (AO).
3. Briefly stated, the facts of the case are that the appellant is a private limited company carrying on the business of real estate developers. It filed its return of income for the AY 2005-06 on 13.02.2006 declaring total income of Rs.10,920/-. The AO, during the course of assessment proceedings, observed that the appellant had incurred bank interest of Rs.56,79,022/- and the same was capitalized as Work- In-Progress (WIP). On further examination, the AO found that the appellant had borrowed interest bearing funds amounting to Rs.13,79,80,794/- and it had given interest-free loans and advances of Rs.3,84,17,356/-to its sister concerns and other related parties. Further, the appellant had given Rs.4,30,59,985/- to M/s Sanchit Securities Pvt. Ltd. as advance against shares. It is held by the AO held that the interest in respect of this advance is not related to the project of the appellant and therefore, the same is not an allowable expenditure. Thus he held interest in respect of the total amount of Rs. 8,14,77,341/- (Rs.3,84,17,356/- plus Rs.4,30,59,985/-) as not allowable. The appellant had claimed interest of Rs.56,79,022/- in respect of secured loans of Rs.13,79,80,794/-. Therefore, the AO disallowed proportionate amount of interest of Rs.33,53,450/- [(Rs.56,79,022/- x Rs.8,14,77,341/- M/s Apurva Developers 3 7766/Mum/2011 )/Rs.13,79,80,794/-]. Thus he allowed the balance amount of interest of Rs.26,25,572/- to be capitalized.
Aggrieved by the order of the AO, the appellant filed an appeal before the Ld. CIT(A). We find that the CIT(A) agreed with the reasons given by the AO and dismissed the appeal.
Before us, the Ld. counsel of the appellant submits that the AO has not properly examined the nexus between the inflow and outflow of liquidity. He files an ‘Annexure’ indicating the details of interest-free loans availed and advances given out of the interest-free unsecured loan received. It is stated by him that the appellant had advanced Rs.2,12,60,000/-out of interest-free unsecured loan received by it of Rs.2,80,00,000/-. It is also stated that most of the advances were given in the financial year 2002-03 and the unsecured loan was also received in the same year. Therefore, the loans and advances were not given from the bank overdraft of the impugned assessment year. The Ld. counsel further submits that interest expense cannot be properly assessed unless it is subjected to the test of commercial expediency. Reliance was placed by him inter alia on the decision in S.A. Builders v. CIT 288 ITR 1 (SC).
On the other hand, the Ld. DR relies on the order of the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. We find that the AO has not properly examined the nexus between inflow and outflow of liquidity. Therefore, we set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to M/s Apurva Developers 4 ITA Nos. 7765, 7766/Mum/2011 examine the contentions of the appellant delineated at para 5 hereinbefore and pass a de novo order, after giving reasonable opportunity of being heard to the appellant. We direct the appellant to file the relevant documents/evidence before the AO. As the matter has been set aside, the appellant may file the documents submitted before us as additional evidence before the AO. Thus the 1st ground of appeal is allowed for statistical purposes.
8. The 2nd ground raised by the appellant in this appeal is against the order of the Ld. CIT(A) confirming the treatment given by the AO of unsecured loans of Rs.10,60,269/- as deemed dividend u/s 2(22)(e) and adding the same to the total income.
9. In a nutshell, the facts are that the AO having verified shareholding pattern of the appellant and the lenders found that Shri Kan H. Lakhani was holding 49.7% shares in the appellant-company. The shareholding of Shri Kan H. Lakhani in the companies who had given loans are as under:
Name of lender Reserves(Rs.) Loan amt received Common share Amountof deemed during the year holder & % of dividend (Rs.) (Rs.) holding Aniya Investment 37,339/- 81,95,000 Kan H Lakhani 37,339/- Pvt. Ltd. 92.3% M.K. InfinPvt. Ltd. 10,60,296/- 30,40,000/- Kan H. Lakhani 90% 10,60,296/- Rambo Investment Kan H Lakhani 28,034 49,46,500 28,034/- & Finance Pvt. Ltd. 97.5% Total 11,25,669/- The AO relying on the CBDT Circular No. 495 dated 22.09.1987 and the order of the ITAT ‘F’ Bench, Mumbai dated 11.08.2009 in the M/s Apurva Developers 5 7766/Mum/2011 case of M/s UnisolInfraservices Pvt. Ltd. made an addition of the above amount of Rs.11,25,669/- as deemed dividend u/s 2(22)(e) of the Act.
Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that the Ld. CIT(A) has restricted the addition to the accumulated reserve of Rs.10,60,296/-.
Before us, the Ld. counsel of the assessee relies on the decision in CIT v. Ankitech (P.) Ltd. (2012) 340 ITR 14 (Del) and submits that loans or advances ought to be taxed as ‘deemed dividend’ u/s 2(22)(e) only in the hands of a registered shareholder of the lending entity and not in the hands of an assessee, who is not a registered shareholder of the lending entity. Reliance is also placed by him on the decision in CIT v. G.T.Z. Securities Ltd. (2013) 359 ITR 349 (J&K).
On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. In a recent judgment, the Hon’ble Supreme Court in National Travel Services v. CIT[2018] 89 taxmann.com 332 (SC) dealing with the case of Ankitech Pvt. Ltd. (supra) and section 2(22)(e) held: “17. We are of the view that it is very difficult to accept the reasoning of the Division Bench. It is not enough to say that Ankitech's case refers to the second limb of the amended definition, whereas the present case refers to the first limb, for the simple reason that the word "shareholder" in both limbs would mean exactly the same thing. This is for the reason that the expression "such shareholder" in the second limb would show that it refers to a person who is a "shareholder" in the first limb.
M/s Apurva Developers 6 7766/Mum/2011 18. This being the case, we are of the view that the whole object of the amended provision would be stultified if the Division Bench judgment were to be followed. Ankitech's case, in stating that no change was made by introducing the deeming fiction insofar as the expression "shareholder" is concerned is, according to us, wrongly decided. The whole object of the provision is clear from the Explanatory memorandum and the literal language of the newly inserted definition clause which is to get over the two judgments of this Court referred to hereinabove. This is why "shareholder" now, post amendment, has only to be a person who is the beneficial owner of shares. One cannot be a registered owner and beneficial owner in the sense of a beneficiary of a trust or otherwise at the same time. It is clear therefore that the moment there is a shareholder, who need not necessarily be a member of the Company on its register, who is the beneficial owner of shares, the Section gets attracted without more. To state, therefore, that two conditions have to be satisfied, namely, that the shareholder must first be a registered shareholder and thereafter, also be a beneficial owner is not only mutually contradictory but is plainly incorrect. Also, what is important is the addition, by way of amendment, of such beneficial owner holding not less than 10% of voting power. This is another indicator that the amendment speaks only of a beneficial shareholder who can compel the registered owner to vote in a particular way, as has been held in a catena of decisions starting from Mathalonev. Bombay Life Assurance Co. Ltd., [1954] SCR 117.
This being the case, we are prima facie of the view that the Ankitech judgment (supra) itself requires to be reconsidered, and this being so, without going into other questions that may arise, including whether the facts of the present case would fit the second limb of the amended definition clause, we place these appeals before the Hon'ble Chief Justice of India in order to constitute an appropriate Bench of three learned Judges in order to have a relook at the entire question. 20.Ordered accordingly.”
M/s Apurva Developers 7 7766/Mum/2011 In view of the above, we direct the AO to wait and follow the decision as per para 19 of the above judgment of the Hon’ble Supreme Court. 14. In the result, the appeal is partly allowed. ITA No. 7766/MUM/2011 Assessment Year: 2008-09 15. The 1st ground raised by the appellant in this appeal is against the order of the Ld. CIT(A) confirming the disallowance of interest on unsecured loan of Rs.43,62,480/- and deducting the same from capital WIP.
16. In a nutshell, the facts are that the AO observed during the course of assessment proceedings that the interest-free loans given by the appellant are much more than the OD facility availed by it, in respect of which the interest was being paid. Hence, the AO disallowed the interest of Rs.43,62,479/- debited to the P&L account.
17. In appeal, the Ld. CIT(A) agreed with the reasons given by the AO and dismissed the appeal filed by the assessee.
18. Before us, the Ld. counsel of the appellant submits that the AO has not properly examined the nexus between inflow and outflow of liquidity. He files an ‘Annexure’ before the Tribunal giving the details of its income, interest-free loans availed and advances given out of interest-free unsecured loan received by the appellant. It is stated by him that the appellant had advanced Rs.3,29,00,000/- out of the interest-free unsecured loan received of Rs.3,75,00,000/-. It is further M/s Apurva Developers 8 7766/Mum/2011 stated by him that major loans and advances were not given from the bank draft additionally availed during the year under consideration. The Ld. counsel further submits that interest expense cannot be properly assessed unless it is subjected to the test of commercial expediency. Reliance is placed by him inter alia on the decision in S.A. Builders (supra).
19. On the other hand, the Ld. DR relies on the order of the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. We find that the AO has not properly examined the nexus between inflow and outflow of liquidity. Therefore, we set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to examine the contentions of the appellant delineated at para 18 hereinbefore and pass a de novo order, after giving reasonable opportunity of being heard to the appellant. We direct the appellant to file the relevant documents/evidence before the AO. As the matter has been set aside, the appellant may file the documents submitted before us as additional evidence before the AO. Thus the 1st ground of appeal
is allowed for statistical purposes.
21. The 2nd ground raised by the appellant is against the order of the Ld. CIT(A) confirming the treatment given by the AO of unsecured loans of Rs.62,51,154/- as deemed dividend u/s 2(22)(e) and adding the same to the total income of the assessee.
22. In a nutshell, the facts are that the AO having verified shareholding pattern of the appellant and the lenders found that Shri Kan H. Lakhani M/s Apurva Developers 9 ITA Nos. 7765, 7766/Mum/2011 was holding 49.7% shares in the appellant-company. The shareholding of Shri Kan H. Lakhani in the companies who had given loans are as under:
Loan amt received Common share Amount deemed Name of lender Reserves (Rs.) during the year holder & % of dividend (Rs.) (Rs.) holding Aniya Investment 1,99,60,432 50,00,000 Kan H Lakhani 50,00,000 Pvt. Ltd. 92.3% M.K. InfinPvt. Ltd. 12,51,154 35,30,000 Kan H. Lakhani 12,51,154 90% Rambo Investment 28,034 13,40,000 Kan H Lakhani 28,034 & Finance Pvt. Ltd. 97.5% Bella Vista 14,84,319 50,000 Kan H Lakhani 50,000 Investments Pvt. 28% Ltd. Kewal Holdings Pvt. Kan H Lakhani Ltd. 86% Total 63,29,188 The AO relying on the CBDT Circular No. 495 dated 22.09.1987 and the order of the ITAT ‘F’ Bench, Mumbai dated 11.08.2009 in the case of M/s UnisolInfraservices Pvt. Ltd. made an addition of the above amount of Rs.63,29,188/- as deemed dividend u/s 2(22)(e) of the Act.
Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that the Ld. CIT(A) has restricted the addition to Rs.62,51,154/- in the case of Aniya Investment Pvt. Ltd. and M.K.Infin Pvt. Ltd.