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1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 23RD DAY OF FEBRUARY 2016
PRESENT
THE HON’BLE MR.JUSTICE JAYANT PATEL AND THE HON’BLE MRS.JUSTICE S SUJATHA ITA NO.305 OF 2015
Between
1.Principle Commissioner of Income Tax-4, C.R.Building, Queens Road, Bangalore.
The Deputy Commissioner Of Income Tax, Circle -11 (5) Bangalore. ... Appellants (By Sri E.I.Sanmathi, Advocate)
And
Sri. Rajeev Chandrashekar, No.375, III block 13th Main, Koramangala, Bangalore-560 034
2 PAN No.ABHPC 1951E ... Respondent (By Sri S Parthasarathi, Advocate)
The advocate for the appellant has filed the above ITA / Income Tax Appeal Under Sec.260-A of Income Tax Act 1961, arising out of order dated:27/02/2015 passed in ITA No.1440/Bang/2013, for the Assessment Year 2008-2009 praying to decide the foregoing question of law and / or such other questions of law as may be formulated by the Hon'ble Court as deemed fit, set aside the appellant order dated:27/02/2015 passed by the ITAT, 'A' Bench, Bangalore, in appeal proceedings No. ITA No.1440/BNG/2013 for Assessment Year 2008- 2009.
This Appeal coming on for Admission this day, JAYANT PATEL J., delivered the following:
JUDGMENT
The learned Counsel for the appellants-Revenue has submitted the memo for re-framing of questions of law, to which we have permitted.
The present appeal is directed against the order dated 27.02.2015 passed by the Tribunal in ITA No.1440/Bang/2013, whereby the Tribunal has not
3 accepted the case of the Revenue and the appeal is dismissed.
We may record that the re-framed questions formulated by the appellants-Revenue are as under: “1. Whether, on the facts and circumstances of the case, the Tribunal was justified in deleting the addition made by assessing authority in respect of rental income of Kormangala Property No.408 without appreciating the fact that the assessing officer had estimated the fair rent after causing enquiries as to the prevailing rent that similar property would fetch in the posh locality at Koramangala?
Whether on the facts and circumstances of the case, the Tribunal was justified in allowing interest on the loan borrowed without appreciating that the assessee had failed to substantiate with documentary proof, the nexus between the acquisition of
4 the property and the funds borrowed from its related party M/s.Tayana Consult Pvt. Ltd”?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in considering the advance received from M/s.Jupiter Capital Pvt. Ltd. as deemed dividend under section 2(22)(e) of the Act on the basis that the conditions laid down in the said provision are not satisfied without considering the fact that the assessee owns 95% of the shares in M/s.Vectra Holding Pvt. Ltd., which in turn owns 99% shares of M/s.Jupiter Capital Pvt. Ltd., and thus becomes the beneficial owner of M/s.Jupiter Capital Pvt. Ltd.,?”
We have heard Mr.E.I.Sanmathi, learned Counsel appearing for the appellants-Revenue and Mr.Parthasarathi, learned Counsel for the respondent- assessee.
5 5. On the first question, the Tribunal at para-9 has observed thus: “9. We have considered the rival submissions. Perusal of the order of CIT(A) shows that annual value for the property in question has been determined by BBMP at Rs.29,722 for the relevant financial year. The Hon'ble High Court of Karnataka in the case of Shri P. Balakrishnan v. CIT, ITRC No.59/1982 dated 26.2.1982 has taken the view that in the absence of any other details, the ALV fixed by the Corporation is the yardstick for determination of ALV u/s. 23 of the Act. If that yardstick is applied, then the actual rent received by the assessee would be much greater than the ALV determined by the BBMP. The CIT(A), has however determined the ALV u/s. 22/23 of the Act on the basis of Hon'ble Gujarat High Court referred to in the grounds of appeal by the Revenue. The course adopted by the CIT(A) is favourable to the Revenue, but the assessee has not chosen to
6 challenge the same. In the light of law as declared by the Hon'ble High Court of Karnataka and in view of the fact that the CIT(A) has determined the ALV at a much higher figure than what is contemplated by the decision of Hon'ble High Court of Karnataka and in view of the fact that the assessee has not challenged the said determination of ALV by the CIT(A), we are of the view that the order of CIT(A) calls for no interference and should be confirmed. We hold accordingly and dismiss the relevant ground viz., grounds No.2 & 3 raised by the Revenue.”
The aforesaid shows that the Tribunal has followed the decision of the High Court of Gujarat in case of Bipinbhai Vadilal Family Trust Vs. Commissoner of Income-Tax reported at (1994) 208 ITR 1005 Guj, whereby it was held that the reasonable
7 return at the rate of 8.5% on the investment can be considered as the annual rateable value.
Under these circumstances, we do not find that question No.1 raised by the Revenue can be considered as substantial question of law which may arise for consideration in the present appeal.
On question No.2, the Tribunal at paragraph-14 observed thus: “14. We have considered the rival submissions. The findings of the CIT(A) clearly show that assessee had borrowed loans for the purpose of acquiring the property. There is no material on record brought out by the Revenue to dislodge the findings of CIT(A). In view of the above, we find no merits in ground No.4 and the same is dismissed.”
It may also be recorded that on facts, the question for utilization of the fund of the loan taken
8 from ING Vysya Bank for the purpose of repayment of the loan taken from M/s.Tayana Consult Pvt. Ltd., was considered by CIT (Appeals) and at paragraph-4.4 of the said order, it has been recorded as under: “4.4 I have considered the appellant’s submissions and the reasons given by the AO in the assessment order. As mention in preceding para that property bearing No.407, 408 and 409 acquired during the financial year 2002-03 and total investment made thereon of Rs.5,42,36,338/-. Initially loan was borrowed from ING Vysya Bank which was repaid by obtaining loan from M/s Innovision Properties Pvt. Ltd. amounting to Rs.5,19,00,000/-. Here it would be worthwhile to mentioned that said loan was taken for purchase of four sites i.e. site No.407, 408, 409 and 445 at Koramangala and investment made in site No.445 at Rs.1,70,37,600/- and remaining Rs.3,48,62,400/- towards purchase of site No.407, 408 and 409. Further it is also observed that the outstanding loan as on
9 29/06/2004 was repaid after obtaining loan from M/s Tayana Consult Pvt. Ltd. of Rs.5,61,81,550/- on 29/06/2004. Thus if at all interest to be charged on Rs.3,48,62,400/- not on Rs.5,19,00,000/-, since site No.445 was not subjected to lease agreement. Thus the total interest would comes at Rs.20,91,744/- and six months interest would be Rs.10,45,872/-. The Assessing Officer is therefore directed to consider interest of Rs.10,45,872/- while computing income under the head ‘Income from House property.’ Thus the appellant partly succeeds in this ground.”
The aforesaid finding of fact has been confirmed by the Tribunal. It is hardly required to be stated that the Tribunal is the ultimate Court for the finding of fact and when once such finding is confirmed by the Tribunal, we do not find that any question of law would arise for consideration as sought to be canvassed.
10 11. Hence, the appeal does not deserve to be considered on question No.2, since the finding on the utilization of the fund for acquiring property is already confirmed by the Tribunal and the scrutiny of finding of fact is outside the scope of judicial scrutiny in the present appeal.
On question No.3, the Tribunal has observed at paragraphs-21 to 28 which read as under:
We have heard the rival submissions. The provisions of Sec.2(22)(e) of the Act, reads as follows: “(e) Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31-5-1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares
11 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 a partner and in which he has a substantial interest (hereafter in this clause 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 in either case possesses accumulated profits.”
Explanation-3 to Section 2(22)(e) is as follows: “Explanation-3: For the purpose of this clause-
(a) “concern” means a Hindu Undivided Family, or a firm or an association of persons or a body of individuals or a company;
(b) A person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the
12 previous year, beneficially entitled to not less than twenty percent of the income of such concern;”
Section 2(32) defines the expression “person who has a substantial interest in the company”, in relation to a company, means 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, carrying not less than twenty percent of the voting power.
An analysis of the above provisions shows that there are three limbs to Sec.2(22)(e) which are as follows:-
“Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31-5-1987, by way of advance or loan
13 First limb
(a) 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,
Second limb (b) or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)
Third limb (c) 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 in either case possesses accumulated profits.”
14 25. In the present appeal we are concerned with the second limb of Sec.2(22)(e) of the Act, viz., “to any concern in which such shareholder is a member or a partner and in which he has a substantial interest”. The following conditions are required to be satisfied for application of the above category of payment to be regarded as Dividend. They are:- (a) There must be a payment to a concern by a company.
(b) A person must be Shareholder of the company being a registered holder and 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. This is because of the expression “Such Shareholder” found in the relevant provision. This expression only refers to the shareholder referred to in the earlier part of Sec.2(22)(e) viz., a registered
15 and a beneficial holder of shares holding 10% voting power.
(c) The very same person referred to in (b) above must also be a member or a partner in the concern holding substantial interest in the concern viz., when the concern is not a company, he must at any time during the previous year, be beneficially entitled to not less than twenty percent of the income of such concern; and where the concern is a company he must be the owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty percent of the voting power
(d) If the above conditions are satisfied then the payment by the company to the concern will be dividend.
The Special Bench of ITAT, Mumbai, in the case of Bhaumik Color Labs ITA 5030/M/04, 118 ITD 1 (SB) (Mum), considered the question
16 Whether deemed dividend u/s. 2(22)(e) of the Income Tax Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender? The Special Bench held that deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. The Special Bench on the above issue has observed as follows:- 30. At the outset it has to be mentioned that provisions of Sec.2(22)(e) which brought in a new category of payment which was to be considered as dividend as introduced by the Finance Act 1987 w.e.f.1-4-88 viz., payment by a company “to any concern in which such shareholder is a member or a partner and in which he has a substantial interest” do not say as to in whose hands the dividend has to be brought to tax, whether in the hands of the “concern” or the “shareholder”. We have already seen the divergent views on this issue which have
17 been referred to in the earlier part of this order.
The above provisions were subject matter of consideration before the Hon’ble Rajasthan High Court in the case of CIT Vs. Hotel Hilltop. 217 CTR 527(Raj). The facts of the case before the Hon’ble Court were as follows. The Assessee was one M/S.Hotel Hilltop a partnership firm. This firm received an advance of Rs.10 lacs from a company M/S.Hilltop palace Hotels (P) Ltd. The shareholding pattern of M/S.Hillltop Palace Hotels (P) Ltd., was as follows:
Shri Roop Kumar Khurana : 23.33% 2. Smt.Saroj Khurana :
4.67% 3. Vikas Khurana :
22% 4. Deshbandhu Khurana:
25% 5. Shri.Rajiv Khurana :
25%
The constitution of the firm Hotel Hill Top was as follows:
18 1.Shri Roop Kumar Khurana: 45% 2.Shri.DeshbandhuKhurana: 55%
The AO assessed the sum of Rs.10 lacs as deemed dividend u/s.2(22)(e) of the Act in the hands of the firm because the two partners of M/S.Hotel Hill Top were holding shares by which they had 10% voting power in M/S.Hill Top Palace Hotels (P) Ltd. They were also entitled to 20% of the income of the firm M/S.Hotel Hill Top. Therefore the loan by M/S.Hill Top Palace Hotels (P) Ltd. To the firm M/S.Hotel Hill Top was treated as deemed dividend in the hands of M/S.Hotel Hill Top, the firm under the Second limb of Sec.2(22)(e) of the Act. The CIT(A) held that since the firm was not the shareholder of the company the assessment as deemed dividend in the hands of the firm was not correct. The order of the CIT(A) was confirmed by the Tribunal. On Revenue’s appeal before the Hon’ble High Court, the
19 following question of law was framed for consideration:-
“Whether on the facts and in the circumstances of the case and in law the learned Tribunal was justified in upholding the order of learned CIT(A) deleting the addition of Rs.10 lacs as deemed dividend under Section 2(22)(e) of the IT Act? ”
The Hon’ble Court held as follows:- “ The important aspect, being the requirement of section 2(22)(e) is, that ‘the payment may be made to any concern, in which such shareholder is a member, or the partner, and in which he has substantial interest, or any payment by any such company, on behalf or for the individual benefit of any such shareholder ……. “ Thus, the substance of the requirement is that the payment should be made on behalf of or for the individual benefit of any
20 such shareholder, obviously, the provision is intended to attract the liability of tax on the person, on whose behalf, or for whose individual benefit, the amount is pad by the company, whether to the shareholder, or to the concerned firm. In which event, it would fall within the expression ‘deemed dividend’. Obviously, income from dividend, is taxable as income from the other sources under section 56, and in the very nature of things the income has to be of the person earning the income. The assessee in the present case is not shown to be one of the persons, being shareholder. Of course, the two individuals being R and D. are the common persons, holding more than requisite amount of shareholding and are having requisite interest, in the firm, but then, thereby the deemed dividend would not be deemed dividend in the hands of the
21 firm, rather it would obviously be deemed dividend in the hands of the individuals, on whose behalf, or on whose individual benefit, being such shareholder, the amount is paid by the company to the concern. Thus, the significant requirement of section 2(22)(e) is not shown to exist. The liability of tax, as deemed divided, could be attracted in the hands of the individuals, being the shareholders, and not in the hands of the firm.”
The aforesaid decision of the Hon’ble Rajasthan High Court which is the only decision of High Court, should be sufficient to answer question No.2 which has been referred to the Special Bench by holding that deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. The argument of the learned D.R. that the
22 Hon’ble Rajasthan High Court did not deal with the second limb of Sec.2(22)(e) of the Act is not correct.”
The Special Bench further held as follows:-
“34. We are of the view that the provisions of Sec.2(22)(e) does not spell out as to whether the income has to be taxed in the hands of the shareholder or the concern(non- shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of Sec.2(22)(e) of the Act.
The intention behind enacting provisions of section 2(22)(e) are that closely held companies (i.e. companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as
23 dividend because if so distributed the dividend income would became taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions such payment by the company is treated as dividend. The intention behind the provisions of section 2(22)(e) is to tax dividend in the hands of shareholder. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which it’s shareholder has substantial interest, is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the legislature is therefore to tax dividend only in
24 the hands of the shareholder and not in the hands of the concern.
The basis of bringing in the amendment to Sec.2(22)(e) of the Act by the Finance Act, 1987 w.e.f 1- 4-88 is to ensure that persons who control the affairs of a company as well as that of a firm can have the payment made to a concern from the company and the person who can control the affairs of the concern can drawn the same from the concern instead of the company directly making payment to the shareholder as dividend. The source of power to control the affairs of the company and the concern is the basis on which these provisions have been made. It is therefore proper to construe those provisions as contemplating a charge to tax in the hands of the shareholder and not in the hands of a non-shareholder viz., concern. A loan or advance received by a concern is not in the nature of income. In other words there is a deemed accrual of
25 income even u/s.5(1)(b) in the hands of the shareholder only and not in the hands of the payee viz., non-shareholder (Concern). Sec.5(1)(a) contemplates that the receipt or deemed receipt should be in the nature of income. Therefore the deeming fiction can be applied only in the hands of the shareholder and not the nonshareholder viz., the concern.
The definition of Dividend U/s.2(22)(e) of the Act is an inclusive definition. Such inclusive definition enlarges the meaning of the term “Dividend” according to its ordinary and natural meaning to include even a loan or advance. Any loan or advance cannot be dividend according to its ordinary and natural meaning. The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word “Dividend” is extended to loans and advances to a
26 shareholder or to a concern in which a shareholder is substantially interested deeming them as Dividend in the hands of a shareholder the ordinary and natural meaning of the word “Dividend” is altered. To this extent the definition of the term “Dividend can be said to operate. If the definition of “Dividend” is extended to a loan or advance to a non shareholder the ordinary and natural meaning of the word dividend is taken away. In the light of the intention behind the provisions of Sec.2(22)(e) and in the absence of indication in Sec.2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a nonshareholder cannot be taxed as Deemed Dividend in the hands of a non- shareholder.”
Since the Assessee in the present case is not a shareholder in the lender company, we are of the view that the above decision is
27 squarely applicable to the facts of the Assessee’s case.
The aforesaid shows that the Tribunal after having considered the legal provisions of law of Section 2(22)(e) of the Income Tax Act, has negatived the contention of the Revenue on the factual premise that the assessee in the present case was not a shareholder in the lender Company. Further, the Tribunal has also relied upon the decision of Rajasthan High Court in case of Commissioner of Income Tax Vs. Hotel Hilltop reported at (2009) 313 ITR 116 (Raj).
Under these circumstances, we find that when the question is already covered by the decision of Rajasthan High Court read with the factual aspects that the assessee was not the shareholder of the lender Company, we do not find that any substantial question
28 of law would arise for consideration as sought to be canvassed.
In view of the above, the appeal is lacking merit and does not deserve to be entertained. Therefore, the appeal stands dismissed.
Sd/- JUDGE
Sd/- JUDGE
JT/-