M/S. SINDHU REALTORS PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘G’ : NEW DELHI) BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT and SHRI A.T. VARKEY, JUDICIAL MEMBER ITA No.2768/Del./2012 (ASSESSMENT YEAR : 2008-09) DCIT, Circle 8 (1), vs. M/s. Sindhu Realtors Pvt. Ltd., New Delhi. C – 102, LGF Surya Nagar, New Multan Nagar, New Delhi – 110 056. (PAN : AAICS0537M) ITA No.2706/Del./2012 (ASSESSMENT YEAR : 2008-09) M/s. Sindhu Realtors Pvt. Ltd., vs. DCIT, Circle 8 (1), C – 102, LGF Surya Nagar, New Delhi. New Multan Nagar, New Delhi – 110 056. (PAN : AAICS0537M) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/Shri Salil Kapoor & Sanat Kapoor, Advocates REVENUE BY : Shri B.R.R. Kumar, Senior DR Date of Hearing : 09.11.2015 Date of Pronouncement : 11.12.2015 O R D E R PER A.T. VARKEY, JUDICIAL MEMBER :

2 ITA No.2706 & 2768/Del./2012

These cross appeals, at the instance of the revenue and assessee, are

filed against the order of the CIT (Appeals)-XI, New Delhi dated 14.03.2012

for the assessment year 2008-09.

addition of Rs.1,03,12,934/- made by the AO under section 2(22)(e) of the

Income-tax Act, 1961 (hereinafter ‘the Act’).

the year under consideration, the return of income declaring total income of

Rs.35,26,578/- was filed on 30.09.2008. The case was processed u/s 143 (1)

of the Act and subsequently, the same was selected for scrutiny. During the

course of hearing, the AO noticed certain facts and based on that, a show

cause notice along with questionnaire u/s 142(1) dated 08.07.2010 was issued.

The assessee filed the reply to the said notice. After considering the reply of

the assessee, the AO found certain claims of the assessee not tenable.

4.1 Out of the those certain claims, one of the issues is against the addition

of Rs.1,03,12,934/- under section 2(22)(e) of the Act, which is the dispute in

the present appeal. The facts relating to this issue are as follows.

4.2 The AO vide show cause notice dated 09.12.2010 asked the assessee to

explain as to why loan of Rs.1,03,12,934/- taken from M/s. Sindhu Trade

Links Ltd. (hereinafter ‘STLL’) be not treated as deemed dividend in view of

3 ITA No.2706 & 2768/Del./2012

the facts that directors of the assessee company are substantially interested in

the said companies and also some of the shareholders are common in both the

companies. In response, the assessee furnished the facts stating that section

2(22)(e) is not applicable to the assessee company, which are reproduced

hereunder :-

(i) M/s STLL is a NBFC registered with RBI (proof of being NBFC is enclosed herewith). Section 2(22)(e) of the Income Tax Act, 1961 is not applicable to loan or advance given by a company having primary business as lending business . (ii) M/s. STLL is a listed company on Delhi stock exchange and Jaipur stock exchange. Proof of being listed is enclosed herewith. Section 2(22)(e) of the Income Tax Act, 1961 is applicable only in respect of closely held companies.

(iii) M/s Sindhu Realtor Pvt. Ltd. is not holding more than 10% shares in M/s STLL. (copy of shareholding of M/s Sindhu Trade Links Ltd. is enclosed herewith). Hence Section 2(22)(e) of the Income Tax Act, 1961 is not applicable. (iv) There is no single shareholder holding more than 10% in M/s STLL, hence question that a shareholder holding more than 10% in M/s STLL, holding more than 20% in Assessee Company does not arise. Hence the Section 2(22)(e) of the Income Tax Act, 1961 is not applicable.

The assessee, therefore, submitted before the AO that in view of the above,

provisions of Section 2(22)(e) of the Income Tax Act, 1961 shall not be

invoked. Further, as regards the assessee’s submission that STLL is a public

limited company and is in the category of NBFC, the AO observed that it has

no merit on the issue because of the following reasons:-

(i) "Sindhu Trade Links Ltd." (STLL) is a Limited Company only because its paid up share capital base is more than Rs. 5 crores but it is not a widely held public limited company in which the public are substantially interested, as envisaged in the section 2(22)( e) of the IT Act 1961. Provisions of section 2(22)( e) of the Act is being reproduced for better understanding: -

4 ITA No.2706 & 2768/Del./2012

"(22) "Dividend" includes- 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 31st 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 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; (ii) Although the STLL has claimed that the equity shares of the company is listed on Delhi Stock Exchange and Jaipur Stock Exchange, but in Para 13 of the director’s report itself, it has also been mentioned that "these shares were not traded during the year under review. (iii) As per Para 5 of the director's report, "the company has not invited or excepted any public deposit within the meaning of section 58A & 58AA of the company Act,1956 and section 45-I(bb) of the Reserve Bank of India Act 1934 during the year under review. The company does not hold any Public Deposit as on date and will not accept the same in future without the prior approval of Reserve Bank of India in writing. (iv) The AR vide letter dated 13-12-2010 has furnished share holding pattern of STLL as on 31-03-2008. It is seen from there that though the AR submitted that the STLL is a public limited company, but has failed to substantiate that it is a public limited company in which public are substantially interested. As per the share holding pattern filed by the AR it is found that there were in total 279 share holders of the STLL as on 31.03.2008. There are 5 directors cum share holders/directors of the STLL who are also partner or substantial share holders or directors in various companies/firms including the assessee company. These Directors/share holders are - 1. Shri Rudra Sen Sindhu 2. Shri Abhimanyu Sindhu 3. Shri Vir Sen Sindhu 4. Shri Dev Suman Sindhu 5. Shri Vrit Pal Sindhu As regards the Assertion of the AR that the company STLL is a public limited company, it is being demonstrated herewith that this is not "a company in which public are substantially interested" because -

5 ITA No.2706 & 2768/Del./2012

This is a company in which shares have not been traded by the public at large; a. Although the AR has claimed that the STLL is a listed company at Delhi Stock Exchange and Jaipur Stock Exchange but once again it may be pointed out here against the STLL that the onus was on the assessee company/AR that the STLL continues to be listed at the Stock Exchanges and it was not delisted or not suspended - it is so because the auditor / directors themselves have stated in the annexures/notes that there was no trading in the shares of the company on stock exchanges. b. Even though as on 31-03-2008, there were 42,50,000 number of shares of this company and even though, there were 279 share holders of this company, but major quantity of shares were held by Mr. Sindhu and his family members / associates.

The AO observed that out of five directors, Sindhu and his family members

itself controls nearly 59% shareholdings of the STLL and in this situation, it

could not be accepted that the STLL was a public company where public was

substantially interested. He further observed that the percentage of shares of

other directors and their family members would again go on to prove that it

was not a company in which public are substantially interested, rather it was a

company which was closely held by the promoter Mr. Sindhu and his family

members and therefore the saving clause (ii) of section 2(22) of the Act would

not be applicable and come to the rescue of the Assessee Company insofar as

invoking section 2(22) (e) was concerned. According to the AO, the onus

was on the assessee to prove that STLL was a widely held public limited

company in which the public were substantially interested and the onus was

also on the assessee company that the shares of the STLL were widely traded

and its shares were available in the open market for purchase and sale by any

6 ITA No.2706 & 2768/Del./2012

common man/person and held that the assessee failed to discharge its onus

and the AO countered the submissions of the assessee that the STLL was an

NBFC and therefore the deeming provision of section 2(22)( e) would not be

applicable by giving the following reasons:-

“The Income Tax Act provides certain exceptions with the respect to the provision of deemed dividend. This has been laid down in saving clause (ii) section 2(22) of the IT Act, which be reproduced herewith - "but "dividend" does not include- (ii) any advance or loan made to a 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.” But so far as this assessee is concerned, it has failed to substantiate that the transactions by the STLL in the form of advances or loans were “in the ordinary course of its business”. The onus was cast on the assessee company to substantiate that the loans and advances received by it from the group company or associates company (STLL), in which common directors are beneficial share holders, were in the ordinary course of business i.e. advancing of loans & advances on Interest of the payer company.” Same is the case of PHDL. The assessee has failed to prove that the advances were given in the normal course of business.”

Accordingly, relying on various authorities and factual matrix, the AO held

that the advances/loans received by the assessee were liable to be taxed in the

hands of the assessee as deemed dividend as per section 2(22)(e) r.w.s. 56 and

section 115O of the Act and Rs.1,03,12,934/- was added back to the total

income of the assessee.

4.4 Aggrieved, the assessee went in appeal before the ld. CIT (A) who

deleted the addition by observing as under :-

7 ITA No.2706 & 2768/Del./2012

“Ground No.4, 5, 6 & 7 : Addition of Rs.1.03 crore u/s 2(22)(e) of the Income Tax Act, 1961 being inter corporate deposit received from company holding NBFC certificate. The AO made the above addition on account of loans received from two companies, holding them to be associated companies as well as companies in which public are not substantially interested. The AO has held that even though the companies were listed companies they were not ones in which the public were substantially since the shares were not traded on the stock exchange and/or the number of shareholders are limited. The AO seeks to lift the 'corporate veil' to uncover the mechanics of this transaction. The major part of the assessment order deals with this addition, however after a careful perusal, reproducing the same was not found called for since the material issue is whether section 2(22)(e) of the Act is applicable in this case. b. The appellant has submitted extensive arguments on this issue. Again, the crucial issue is found to be whether the lender companies are ones in which the public are substantially interested. Section 2(22)(e): Not applicable to widely held Companies: Section 2(22)(e) uses the words: any payment by a company ''not being a company in which the public are substantially interested" meaning thereby that Section is applicable only to companies which are commonly known as closely held companies. Section 2(18) of the Act reads as under: "(18) "company in which the public are substantially interested"-a company is said to be a company in which the public are substantially interested- (b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely:- shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognized stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made there under;” It was vehemently argued that these conditions are fulfilled by the lender companies and hence they are companies in which the public are substantially interested, and hence the deeming provisions of section 2(22)(e) of the Act cannot apply to the loans in question.

8 ITA No.2706 & 2768/Del./2012

c. The issue has been carefully perused, and the AO's action in not considering the lender companies as those in which the public are substantially interested is found incorrect. In fact what is relevant to this issue is quoted in the assessment order itself as, “it will be well to recall the words of Rowlatt J in Cape Brandy Syndicate v. Inland Revenue Commissioners [1921] 1 KB 64 (KB) at page 71, that: "…..in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used". Even while quoting this in the assessment order the AO seeks to go beyond the intention of the Act. Especially in deeming provisions. the interpretation cannot be stretched to the disadvantage of assessees. In this case the AO was not required to go beyond the definition in section 2(18) of the Act. Even the plethora of case laws quoted by the AO are found wanting on relevance to the present issue. The addition of Rs.2.70 crores (figures wrongly typed - the exact figure is Rs.1.03 crores) on account of deemed dividend is therefore deleted. This ground is ruled in favour of the appellant.”

issue.

loan of Rs.1.03 crores taken from M/s. Sindhu Trade Links Ltd. (STLL) was

rightly treated as deemed dividend in view of the facts that directors of the

assessee company are substantially interested in the said company and also

some of the shareholders are common in both the companies. He further

submitted that out of five directors, Sindhu and his family members itself

controls nearly 59% shareholdings of the STLL and in this scenario, it could

not be accepted that the STLL was a public company where public was

substantially interested. He further submitted that the percentage of shares of

other directors and their family members would again go on to prove that it

was not a company in which public are substantially interested, rather it was a

9 ITA No.2706 & 2768/Del./2012

company which was closely held by the promoter Mr. Sindhu and his family

members and therefore the saving clause (ii) of section 2(22) of the Act would

not be applicable and come to rescue of the Assessee Company insofar as

invoking section 2(22) (e) was concerned. The ld. DR submitted that the

assessee failed to prove the onus that STLL was a widely held public limited

company in which the public were substantially interested and that the shares

of the STLL were widely traded and its shares were available in the open

market for purchase and sale by any common man/person. He also submitted

that the assessee has failed to prove that the STLL was an NBFC, therefore,

the deeming provision of section 2(22)( e) would be applicable. He,

therefore, submitted that the loans are nothing but deemed dividend and is

liable to be taxed in the hands of the assessee and in this regard, he made

reference to the various judicial pronouncements relied upon by the AO.

CIT (A) and for the sake of clarity, the same are reproduced hereunder :-

“Ground III – Amount involved is Rs.1,03,12,934/- The Appellant Company has received Inter Corporate Deposits of Rs.1.03 Crore from M/s Sindhu Trade Links Ltd (STLL) during the year under assessment. The Appellant Company was show caused vide notice dated 09.12.2010 during the course of assessment proceedings as follow: "It is seen from the details filed that the assessee company has taken loan of Rs.1,03,12,934/- from Sindhu Trade Links. It is also noticed that Directors of the assessee company are substantially interested in both the above named company. It is also noticed that some share holders are

10 ITA No.2706 & 2768/Del./2012

common to both the companies. In view of these facts, you are being show caused as to why not provision of section 2(22)(e) of the act be invoked" It was submitted vide letter dated 13.12.2010 (Copy enclosed) that STLL is a NBFC certificate holding company and also stock exchange listed company. Proof of being NBFC and Listed companies was submitted during the course of assessment proceedings. It was also pleaded while submitting the shareholding charts of STLL that Appellant Company is not holding shares exceeding 10% of M/s Sindhu Trade Links Ltd's total shareholding. Also none of the shareholder holding more than 10% in STLL is holding 20% shares in the Appellant Company. Hence provisions of Section 2(22)(e) of the Income Tax Act, 1961 are not applicable. However the Ld. AO chose to treat the ICD received as Deemed dividend in the hands of Appellant Company. My kind attention has been drawn to Section 2(22)(e) of the Income Tax Act, 1961 which is reproduced as under :- 2. (22) "dividend" includes- ... (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 31st 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 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; .... But “dividend" does not include - (ii) any advance or loan made to a 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; The assessee company submitted the interpretation of the Section point wise vis a vis observation of the Ld. AO as follows : 1. Section 2(22)(e): Shareholding conditions not applicable

Section 2(22)(e) of the Income Tax Act, 1961 is attracted when a shareholder having shares not less than 10% receive any advance or loan

11 ITA No.2706 & 2768/Del./2012

from such company or any concern receive any advance or loan from such company in which a shareholder holding more than 10%, also holds substantial interest i.e. 20% shareholding in the concern who received the loan. From the Balance sheet as on 31.03.2008 - Investment schedule of the Assessee Company (Copy enclosed) and Shareholding charts of STLL and PHDL, it is clear that the Assessee Company is not holding any shares in these companies and hence in no way the amounts can be taxed in the hands of Assessee Company. Further note from Shareholding charts of STLL that there is no shareholder holding 10% in these companies, who is further holding 20% in the Assessee Company. Hence Section 2(22)(e) of the Income Tax Act, 1961 is not applicable since shareholding condition, mandatory for applicability of Section 2(22)(e) of the Income Tax Act, 1961 are not satisfied. 2. Section 2(22)(e) applicable in the hands of shareholder:

Neither the Appellant Company is shareholder in these companies nor there is a shareholder holding 10% in these companies, is holding 20% in the Appellant company. Hence addition made in the hands of Appellant Company, should not have been made. 3. Section 2(22)(e): Not applicable to widely held Companies:

Section 2(22)( e) uses the words : any payment by a company "not being a company in which the public are substantially interested" meaning thereby that Section is applicable only to companies which are commonly known as closely held companies. Section 2(18) of the Act reads as under: "(18) "company in which the public are substantially interested''-a company is said to be a company in which the public are substantially interested- (b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely:- (A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognized stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder;

12 ITA No.2706 & 2768/Del./2012

It was submitted before the Ld. AO that STLL is Public Limited Company through following evidences which have been discussed by Ld. AO at page no. 10 to 13 in the Assessment order: (a) Listing evidences of being listed on Delhi Stock Exchange and Jaipur Stock Exchange. (b) Shareholding pattern as on 31.03.008 of the Assessee Company

Stand taken by the Ld. AO : a. The Ld. AO has observed on page 10 - para (ii) & (iii) that for STLL, in the Director report, it has been stated that shares were not traded during the year and also further stated that Company has not accepted the public deposits. b. The Ld. AO observed at page 11 that STLL has claimed that it is a listed company but no evidence has been provided regarding that it continues to be listed at stock exchanges and has not been suspended or de-listed. c. The Ld. AO observed at page 13 that nearly 59% shareholding is controlled by its Directors, family members. Hence with above allegations, the Ld. AO remarked that the STLL is not a company in which "Public is a substantially interested".

Submission before your good self against Ld. AO observation : The Assessee company replied to the observations made by the Ld. AO point wise : a. Trading of shares and acceptance of public deposit are no parameters to check whether a company is a widely held Company or not. It is the section 2(18) definition which should prevails while assessing whether a Company is a company, in which Public is substantially interested or not. b. The allegation of the Ld. AO that the Appellant Company has failed to evidence that STLL and PHDL continues to be listed at stock exchanges and has not been suspended or de-listed, is not correct. As an evidence of being listed on Delhi Stock Exchanges, the Appellant Company submitted the Annual Listing fee bills raised by the respective stock exchanges on the STLL. Proof of payment of listing fee for both the stock exchanges were submitted during the course of assessment proceedings vide letter date 15.12.2010. Had the STLL was been

13 ITA No.2706 & 2768/Del./2012

suspended or delisted, stock exchanges would not have raised the annual listing fee bills. Further as per information available in public domain on Delhi Stock Exchange website at http://www.dseindia.org.in/sitepages/list companies.php it can be seen that STLL is a listed company on Delhi Stock Exchange. Since the list involve 2830 companies, the Assessee Company submitted relevant extract showing evidence in regard to STLL only. Further submitted that there was no adverse material on record or brought on record by the Ld. AO to support her contentions regarding STLL. Hence the allegations made by the Ld. AO is baseless, arbitrary and made in a reckless manner. c. Controlling 59% shareholding in a company by promoter group does not mean that the company is a closely held company. If it is so then almost 95% of the NSE or BSE listed companies would be treated as closely held companies. For your ready reference, shareholding pattern of NSE/BSE listed reputed companies for DLF Ltd., TATA Consultancy Services Limited, Reliance Limited as on 31.03.2008 have been placed on record. The same is available in public domain on the websites of NSE and BSE. The assessee company submitted that from the shareholding pattern of these companies, it can be seen that Promoter shareholding for these companies is much more that what is for the Assessee Company. Somewhere it is hovering around 88%. Still they are regarded as listed and widely held companies. So the same parameter shall be used for Assessee Company also . Further as per Securities Contract (Regulation) Rules, 1957, Rule 19(2)(b) provides following with respect to public shareholding for a listed company: "Requirements with respect to the listing of securities on a recognized stock exchange. 19. (2) Apart from complying with such other terms and conditions as may be laid down by a recognized stock exchange, an applicant company shall satisfy the stock exchange that: [(b) At least 10 per cent of each class or kind of securities issued by a company was offered to the public for subscription through advertisement in newspapers for a period not less than two days and that applications received in pursuance of such offer were allotted subject to the following conditions:

14 ITA No.2706 & 2768/Del./2012

(a) minimum 20 lakh securities (excluding reservations, firm allotment and promoters contribution) was offered to the public; Provided that if a company does not fulfil the conditions, it shall offer at least 25 per cent of each class or kind of securities to the public for subscription through advertisement in newspapers for a period not less than two days and that applications received in pursuance of such offer were allotted" Since the Assessee Company is in compliance of this rule, allegation that controlling 59% of the shareholding in the Assessee Company would take away the benefit of listing, is purely baseless. 4. Section 2(22)(e): Not applicable on Inter Corporate Deposits

Provisions of Section 2(22)(e) of the Income Tax Act, 1961 are not applicable to Inter Corporate Deposits. They are applicable to payments by way of advance or loans only. Reliance in this regard has been placed on Bombay Oil Industries Ltd. vs DCIT (2009) 28 SOT 383 (ITAT Mum) (Copy placed on record) wherein the Hon'ble ITAT Mumbai has held that since there is a clear distinction between the words advance or loan and Inter Corporate Deposits and hence deeming provisions of Section 2(22)(e) of the Income Tax Act, 1961 cannot be applied to Inter Corporate Deposits. 5. Section 2(22)(e): Not applicable to loan or advance by Non Banking Finance Companies Section 2(22) of the Income Tax Act, 1961 has an exclusion clause that dividend does not include where advance or loan has been given to shareholder 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. The Assessee Company submitted that the Appellant Company is not a shareholder in the STLL, further note that the STLL is a Non Banking Finance Company and Registered with Reserve Bank of India since 1998 in Category of Loan Investment Company and engaged in activities of shares sale, financial activities, loan syndication activities and hypothecation activities. Proof of being NBFC companies was submitted during the course of assessment proceedings vide letter dated 13.12.2010. Further the Profit and Loss Account of the STLL as on 31.03.2008 (Copies of Balance sheet and Profit and Loss are enclosed herewith) shows that STLL has earned following income out of NBFC activities:

Particulars Sindhu Trade Links Ltd. Interest Income 32,532,082.00 Loan Syndication Charges 7,129,302.23 Hypothecation Charges 1,562,631.81

15 ITA No.2706 & 2768/Del./2012

Bad Debts recovered 1,613,303.00 Misc. receipts in nature of Processing fee 1,647,815.06 etc. Total 44,485,134.10

The above details shows that STLL is perusing NBFC activities and Inter Corporate Deposit has also been advanced in the ordinary course of activities.”"

only dispute is whether the lender companies which has made deposits (Inter-

Corporate Deposits (ICD)) will fall under the deeming provision under

section 2(22)(e) of the Act or not. We find that section 2(22)(e) excludes

public company “not being a company in which the public are substantially

interested”. Section 2(22)(18) of the Act defines companies in which the

public are substantially interested. As per the said definition, a company is

said to be a company in which the public are substantially interested, if it is a

company which is not a private company as defined in the Companies Act,

1956 (1 of 1956) and the conditions specified either in Item A or in Item (B)

are fulfilled, namely :-

“(A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognized stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder.”

We find that the assessee before the AO and the ld. CIT (A) has submitted

that both these companies are public limited companies and they have

produced evidences to substantiate that the STLL is a listed company at Delhi

16 ITA No.2706 & 2768/Del./2012

Stock Exchange and Jaipur Stock Exchange and also the shareholding pattern

as on 31.03.2008. And that Section 2(22)(e) is not applicable to loans or

advances by Non Banking Finance Companies (NBFC). In order to

substantiate that STLL is NBFC, it was submitted that they are registered with

Reserve Bank of India since 1998 in Category of Loan Investment Company

and engaged into the activities of shares sale, financing activities, loan

syndication activities and hypothecation activities. It is a well settled

principle of law that deeming provision has to be interpreted strictly and it

cannot be stretched to more than that for which the deeming provision can be

literally interpreted. Nothing can be added or implied while interpreting a

deeming provision. One can only look at the language used. Therefore, we

concur with the ld. CIT (A) that the lender company i.e. M/s. STLL is a

public limited company and so the loan/advance/ICD given to the assessee

does not fall in the ken of section 2(22)(e) and moreover, the lender company

is a NBFC which is also excluded from the said deeming provision, therefore,

we do not find any merit in this ground of appeal and we uphold the ld. CIT

(A)’s order and dismiss this ground.

The effective ground taken by the assessee is against confirming the

disallowance of total interest debited to Profit & Loss Account of

17 ITA No.2706 & 2768/Del./2012

Rs.16,15,903/- in view of the fact that the assessee has given share application

money of Rs.9.86 crores which is not earning any interest income and the

assessee has no surplus funds without appreciating that the assessee company

is available with interest free share holder funds of Rs.34.46 crores.

which refers for current assets, loans and advances, the assessee had shown

an amount of Rs.14,03,24,434/-. According to the AO, a perusal of the

bifurcation of this amount showed that the assessee had given advance of

Rs.9,86,87,800/- in the garb of share application money to various entities. He

asked the assessee to provide details of the same and to confirm whether

shares had been allotted in its name or not and he further show caused as to in

the case of non allotment of such shares why not an appropriate rate of

interest be charged thereupon in view of the facts that it is bearing an interest

burden of Rs.16,15,903/- apart from bank charges of Rs.47,906/-. He further

observed that the assessee had made a veiled attempt to show that it was not

bearing any interest burden due to amount paid as share application money.

After observing the assessee’s contention and the details furnished, the AO

found that the assessee had given loans and advances of Rs.14,03,24,434/-

and out of which, an amount of Rs.9,86,87,800/-had been expressly shown as

loans and advances in the balance sheet although in the latter details the

assessee had shown it in the garb of share application money but it had failed

18 ITA No.2706 & 2768/Del./2012

to discharge its onus that these advances were in the ordinary course of

business of the assessee company. The AO observed that since the assessee

was not in the business of finance and it was also not a NBFC company it

could not be said that it had advanced this much huge amount in the ordinary

course of business. He further opined that the assessee was in the business of

civil construction where money was very much required and further, the

assessee had not proved that the money which it advanced in the form of/in

the garb of share application money were actually allotted to the assessee. He

held that the assessee had failed to substantiate as to whether the money

advanced in the garb of share application money would give any income to

the assessee in the ordinary course of business or not. He further observed

that this transaction was directly in the nature of loans and advances and the

appellant company had not shown any return of income/Interest on this

amount. Further, as per the P & L account, the assessee had debited an

amount of Rs.16,15,903/- as interest on loans and Rs.47,906/- as bank

charges. The AO, however, observed that keeping in line with the various

Hon'ble Courts, interest could be disallowed from the profit & loss account to

the extent of quantum of fund diverted by the assessee to other persons and

where no interest was charged or interest was charged at lower rate Interest.

Accordingly, the AO was of the opinion that interest was disallowable for

diversion of fund of Rs.9,86,87,800/- and if the same was calculated at the

19 ITA No.2706 & 2768/Del./2012

rate of 18% per annum that would come to Rs.1,77,63,804/-. But, the AO

opined that since the assessee was bearing interest burden of Rs.16,15,903/-

only, the disallowance could not be made more than that. He also declined

the submission of the assessee that it was not bearing any interest burden due

to the amount paid as share application money because the fact remained that

the appellant had borrowed interest bearing loans and had debited

Rs.16,15,903/- in the P & L account. Accordingly, the AO ordered to

disallow the interest debited to the P & L account and made an addition of

Rs.16,15,903/- to the income of the assessee.

confirmed the action of the AO on this issue.

relevant submissions made are reproduced below for the sake of clarity :-

“The Assessee Company submitted that the Ld. AO has made following allegations: Allegation No.1: The Assessee Company has failed to discharge its onus that advances were in ordinary course of business of the Assessee Company. (Page 3 of the Assessment order) Reply to Allegation: Being Private Limited Company, there is no bar on to it that it cannot give advances in the form of Share Application Money or advances to other parties to pursue to strategic goals by making investments in other companies. Allegation No. 2

20 ITA No.2706 & 2768/Del./2012

The Assessee Company has failed to substantiate as to whether the money advanced in the garb of Share Application Money will give any income to Assessee Company in the ordinary course of business. The Assessee Company has not shown any return on income/interest on these amounts.(Page 3 of the assessment order). Reply to Allegation: The investment are generally made to gain in strategic manner in long term, out of which capital gain will accrue and will be taxed at prevailing rates of that particular time. Investments are not like advances which will start earning Interest from the day one. Each and every Financial product has its own standing in terms of return on it. All over the world, people make investments in equities (be it quoted one or unquoted share) to gain in longer term or to earn Dividends. Also they are considered as the best financial vehicle for earning of people who has long term horizon for making investments. Though in the case of Appellant Company, no allotment was made but this is purely normal. Even in the case of IPDs, people do get back their money back due to non allotment of shares. Also there is no binding provision in SEBI or Companies Acts for non listed companies to pay interest if no Share allotment has been made in reasonable time. Merely the fact that no income has accrued, is that mean that transaction was for non business purposes? Hence the allegations of Ld. AD are purely baseless and arbitrary that money invested was not in ordinary course of business and has not earned income for the year. Allegation No. 3 The other allegation made by the Ld. AD is of diversion of funds made hence he has disallowed interest @ 18% of Rs.9,86,87,800/-, though restricted to Rs. 16,15,903/-. Reply to the allegation: As per above submission which were submitted before the Ld. AO in the course of assessment proceedings also, it is pretty clear that Appellant Company has sufficient free funds and it is free to use them at his own discretion according to needs. It is not open to the Ld. AO to assess what the need of the Appellant Company is? It is a decision which is normally entrusted by the shareholders of the Company to its faithful management who take the decisions depending upon the financial needs, aspirations, goals or objects

21 ITA No.2706 & 2768/Del./2012

set for the company. Nobody can dictate terms to a Appellant as to how to conduct the affairs. Allegation No.4 Another allegation made by the Ld. AD was that since the Assessee Company has borrowed interest bearing loans and has debited interest amount of Rs.16,15,903/- to Profit and Loss Account, this fact in itself is a testimony that the Assessee Company had no surplus fund in so far as to advance non interest bearing funds to other companies. Reply to the allegation: The shareholder fund position as furnished above evidence the fact that Appellant Company was available with more than sufficient free funds for use at its own discretion. Reliance is placed on CIT vs Hotel Savera (1999) 239 ITR 795 (Mad), wherein the Hon'ble Madras High Court has held that once it is established that the Assessee Company is having sufficient free funds, presumption would always be made that advances to third parties have been made out of own free funds. Further Assessee Company submitted that where there are both borrowed funds as also interest free funds, discretion lies in the. hands of the assessee for utilisation of those funds. Reliance for that purpose was placed on the judgment of the Calcutta High Court in the case of Woolcombers of India Ltd. vs. Commissioner of Income-tax (Central), Calcutta, 134 ITR 219. It was further submitted that the view taken by the Calcutta High Court had found approval by the Supreme Court in East India Pharmaceutical Works Ltd. vs. Commissioner of Income-Tax 224 ITR 627 (S.C.) Further reliance in this regard is placed on CIT vs Reliance Utilities and Power Ltd., ITA No. 1398/2008 (Mumbai High Court) pronounced on 09.01.2009. (Copy of judgment placed on record) Hence the Assessee Company pleaded disallowance made of interest shall be deleted since the Appellant Company has utilized borrowed money for the purposes of earning income and interest free funds of Rs. 34.46 Crore means they are in abundance considering the amount of Share Application Money of Rs. 9,86,87,800/- paid by the Appellant Company.”

In view of these submissions, ld. AR pleaded that the orders of the authorities

below be set aside on this issued and the appeal of the assessee be allowed.

22 ITA No.2706 & 2768/Del./2012

the AO has disallowed the interest debited to Profit & Loss account of

Rs.16,15,903/- for the reason that the assessee company has given

advance/share application money of Rs.9.86 crores which is not yielding any

interest income and made a finding also that the assessee company has no

surplus fund since it has also borrowed funds which is bearing an interest

burden of Rs.16,15,903/- apart from bank charges of Rs.47,906/-. So,

according to the AO, since share certificates have not been allotted to the

assessee company, the money has been advanced in the garb of share

application money and will not yield any income to the assessee in the

ordinary course of business and since the company failed to show that it has

yielded any interest on this amount, he was of the opinion that 18% of those

divergent fund of Rs.9,86,87,800/- need to yield interest @ 18% per annum

which works out to Rs.1,77,63,804/-. However, since the assessee is bearing

interest burden of Rs.16,15,903/- only he made the disallowance only to that

extent. He also noted that the fact that the assessee had taken interest bearing

loans shows that assessee does not have any surplus funds. During the

appellate proceedings, the assessee’s claim that it had sufficient surplus fund

which is to the tune of Rs.34.46 crores and the amount of share application

money/advances paid is only Rs.9.86 crores that works out to 28.63% of the

total shareholder funds has not been taken into consideration by the ld. CIT

23 ITA No.2706 & 2768/Del./2012

(A) who has confirmed the disallowance by merely stating that till date, the

shares have not been allowed to the assessee company where the share

application money has been invested as claimed by the assessee. According

to the ld. CIT (A), the assessee has not taken any steps to get back this

amount which has been invested in AYs 2007-08 and 2008-09 and held that it

was a blatant diversion of funds under the guise of share application money.

Before us, the ld. AR took our attention to the following facts which are

revealed by perusal of balance sheet as on 31.03.2008 which is as below :-

“Following is the shareholders fund position of the Appellant Company as on 31.03.2008 : Paid up share capital : 26,200,000/- Share premium : 23,400,000/- Profit and Loss Account : 62,84,839/- Share Application Money : 288,800,000/- Total shareholder fund available Without Interest burden : 344,684,839/-

A perusal of the above reveals that the assessee company had sufficient funds

to the tune of more than Rs.34.46 crores whereas the share application money

invested as on 31.03.2008 only at Rs.9.28 crores which is only 28.63% of the

total shareholder funds. Thus, we note that the assessee company has

sufficient free funds for making advances / investment out of its own share

holder funds without incurring any interest burden. Our attention was

brought to the judgment of Hon’ble Bombay High Court in the case of CIT

24 ITA No.2706 & 2768/Del./2012

vs. Reliance Utilities & Power Ltd. – 313 ITR 340, wherein the judgment of

Hon’ble Supreme Court in the case of East India Pharmaceutical Works Ltd.

vs. CIT – 224 ITR 627 and Hon’ble Calcutta High Court in Woolcombers of

India Ltd. vs. CIT – 134 ITR 219 (Cal.) relied on, held as under :-

“10. If there be interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works (Supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen.. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber’s case (Supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest free fund generated or available with the company, if the interest free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT (Appeals) and Tribunal.”

25 ITA No.2706 & 2768/Del./2012

We find that the assessee company had sufficient free funds and that the assessee had stated before the AO that the borrowed funds have been used for business purposes only and not for the investment, could not be controverted by both the authorities below. The AO erred in concluding that since the assessee company is incurring interest expenditure so no surplus fund is available to the assessee company is erroneous on the fact that the total shareholder fund without interest burden is to the tune of Rs.34.46 crores and, therefore, as per the law laid down by the Hon’ble Apex Court as noted above, we have no hesitation to delete the disallowance of Rs.16,15,903/-. 16. In the result, the appeal of the assessee is allowed.

Order pronounced in open court on this 11th day of December, 2015.

Sd/- sd/- (G.D. AGRAWAL) (A.T. VARKEY) VICE PRESIDENT JUDICIAL MEMBER Dated the 11th day of December, 2015 TS Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A)-XI, New Delhi. 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.