DCIT CIR 6(1), MUMBAI vs. INFOMEDIA 18 LTD, MUMBAI

The next issue contested by the assessee relates to the disallowance of ―due diligence fee‖ of Rs.14.00 lakhs paid to M/s Price Waterhouse Coopers. The assessee had incurred expenses towards Consultancy charges to the tune of Rs.61,99,289/-, out of which the assessee itself disallowed a sum of Rs.47,99,287/-. The balance amount represented due diligence fee of Rs.14.00 lakhs referred above, which was paid in connection with ―Project ivory‖. The AO disallowed the same and the Ld CIT(A) also confirmed the same by observing that the above expenditure has brought a new profit earning apparatus by incurring this expenditure.

Before us, the assessee submitted that the assessee has incurred the impugned expenditure in connection with the due diligence conducted for its inner divisions, i.e., print sales division and special interest publication division. He submitted that the said due diligence was conducted out of commercial expediency to ascertain about the intrinsic value of business. Accordingly, the Ld A.R submitted that the assessee has not brought any new profit earning apparatus, as presumed by the Ld CIT(A). Accordingly he submitted that the decisions relied upon by Ld CIT(A) are not applicable.

We notice that the tax authorities have come to the conclusion that the same represents capital expenditure without examining the purpose for which the impugned expenditure was incurred. According to Ld A.R, it was incurred in respect of its own divisions to ascertain their intrinsic value. Accordingly it was submitted that the Ld CIT(A) was wrong in presuming that the new income earning apparatus was brought into existence. We find that the submissions made by the assessee is in contradiction with the observations made by Ld CIT(A). As stated earlier, the nature of expenditure can be decided only if the purpose of the expenditure is ascertained clearly. The AO has simply disallowed the expenditure without making any discussions, where as the observations made by the Ld CIT(A) has been claimed to be incorrect. Under these set of facts, we are of the view that this issue also requires fresh consideration at the end of the AO. Accordingly, we set aside the order of Ld CIT(A) and direct the AO to examine this issue afresh.

The next issue contested by the assessee relates to the disallowance made u/s 14A of the Act. The assessee has received dividend income of Rs.20.77 lakhs and it has made disallowance u/s 14A of the Act to the tune of Rs.35.57 lakhs. However, the AO computed the disallowance as per Rule 8D of the IT Rules at Rs.1.22 crores. The Ld CIT(A) also confirmed the same. The main contention of the Ld A.R is that the assessing officer did not record his dissatisfaction over the methodology adopted by the assessee to compute the disallowance u/s 14A and hence he could not have invoked the provisions of Rule 8D. In support of this proposition, the assessee placed reliance on the decision rendered by Hon‘ble Delhi High Court in the case of CIT Vs. Taikisha Engineering India Ltd (370 ITR 338). We agree with the said contentions of the assessee. The AO should first examine the workings made by the assessee to compute the disallowance u/s 14A of the Act and if he is not satisfied with the same, having regard to the accounts of the assessee, then he can resort to the provisions of Rule 8D. In the instant case, the assessing officer has failed to adopt this mandatory procedure. Accordingly, this issue also requires fresh examination at the end of the AO. Accordingly, we set aside the order of ld CIT(A) on this issue and direct the AO to examine this issue afresh in the light of discussions made supra.

We shall now take up the appeal filed by the revenue, wherein the only issue contested relates to the deletion of assessment of deemed dividend u/s 2(22)(e) of the Act. The assessee had taken inter corporate deposits amounting to Rs.11.80 crores from one its subsidiaries named American Devices India Pvt Ltd (ADIPL). The AO assessed the same as deemed dividend u/s 2(22)(e) of the Act. The assessee‘s contention is that (a) the provisions of section 2(22)(e) are attracted only if the loan is taken from a company in which public are not substantially interested. However, M/s ADIPL is required to be considered as a company in which public are substantially interested in terms of Companies Act read with sec. 2(18) of the Act and hence sec. 2(22)(e) shall not apply. (b) even otherwise, the provisions of sec. 2(22)(e) shall not apply to the amount taken as inter corporate deposits.

The Ld CIT(A) examined the above said contentions of the assessee and decided the issue in favour of the assessee with the following observations:- ―5.7 Since the current controversy involves interpretation of the provisions of section 2(22)(e) read with the provisions of section 2(18) of the Act, same are reproduced below : ―Section 2(22) "dividend" includes— (a) ……….; (b) ………. ; (c) ……… ; (d) ……; (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 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; Section 2(18): "company in which the public are substantially interested"—a company is said to be a company in which the public are substantially interested— (a) …….. (aa)……. (ab)…… (ac) …. (ad)….. (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 recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder ; (B) 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) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by— (a) the Government, or (b) a corporation established by a Central, State or Provincial Act, or (c) any company to which this clause applies or any subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year. Explanation.—In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words "not less than fifty per cent", the words "not less than forty per cent" had been substituted‖;

8 Let us first assume that the so-called inter-corporate deposits are in the nature of ‗loans or advances‘. If that be so, it will have to be ascertained whether ADIPL is a company in which public are not substantially interested. The appellant‘s claim is that its subsidiary company ADIPL is covered by section 2(18)(b) and hence ADIPL is a company in which public are substantially interested. Section 2(18) (b) starts with a ‗company which is not a private company as defined in the Companies Act, 1956. Therefore, it will be relevant to see as to whether ADIPL is a private company or a public company. It has not been disputed by the ld. AR that in its individual capacity ADIPL is a private limited company. However, the provisions of section 2(18) require that the status of the company as to whether it is private company or not, is to be seen vis-à-vis ―as defined in the Companies Act, 1956‖. Definition of terms of a ‗company‘, ‗existing company‘, private company‘ and public company has been provided in section of the Companies Act as under : ―DEFINITIONS OF "COMPANY", "EXISTING COMPANY", "PRIVATE COMPANY" AND "PUBLIC COMPANY" 3(1) In this Act, unless the context otherwise requires, the expressions "company", "existing company", "private company" and "public company", shall, subject to the provisions of sub- section (2), have the meanings specified below : - (i)……(ii) ; (iii) "private company" means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by is articles, (a) restricts the right to transfer its shares, if any ; (b) limits the number of its members to fifty not including – (i) persons who are in the employment of the company ; and (ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased ; and (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company ; (d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives; Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definition, be treated as a single member; (iv) "public company" means a company which – (a) is not a private company ; (b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed ; (c) is a private company which is a subsidiary of a company which is not a private company.

9 As per the above definition provided in section 3(1)(iv) of the Companies Act, a private company, which is a subsidiary of a public company, is a public company, provided it also has a minimum paid- up capital of Rs. 5 lakhs or more. In view of this definition therefore, the ADIPL, which is a subsidiary of the appellant (being a public company) also becomes a public company. Therefore, once it has become evident that ADIPL is a public company (and hence not a private company), we go back to section 2(18)(b) of the Income Tax Act, which requires that either the condition provided in (A) is satisfied or else the condition provided in (B) is satisfied.

10 So far as the condition provided in clause (A) of section 2(18)(b) is concerned, obviously the same is not satisfied in the case of ADIPL. However, clause (8)(c) of section 2(18)(b) provides that ADIPL would be considered to be a company in which public are substantially interested if 'the shares in the company (i.e. ADIPL) (not being . shares entitled to a fixed rate of dividend or without a dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by any company to which this clause applies or any subsidiary company of such company [if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year]. In this regard, it may be noted that the appellant is a company in which public are substantially interested and the appellant had throughout the current previous year beneficially held more than 50% shares of ADIPL (i.e. shares carrying not less than 50% of the voting power of ADIPL). It is thus quite evident that AOIPL is covered in the definition of 'a company in which public are substantially interested' by virtue of the provisions of clause (B)(c) of section 2(18)(b) of the Act. In view of this therefore, I have no other option than to hold accordingly.

11 In the background of above finding, it is to be ascertained as to whether the aggregate amount of deposits of Rs.11.80 crores can be considered to be deemed dividend in the hands of the appellant in view of the provisions of section 2(22)(e) of the Act. I have already held above that ADIPL is a company in which public are Substantially interested, considering that during the course of F.Y. 2007-08 more than 50% shares of ADIPL were held by the appellant. Since ADlPL is a company in which public are substantially interested, it is evident that the provisions of section 2(22)(e} are not attracted. Hence the amount of RS.11.80 crores cannot be assessed in the hands of the appellant as deemed dividend

12 Coming to the case law cited by the appellant i.e. ACIT Vs: Ajax Investment Ltd,85 ITD 154 (Ahd)(SB), it is seen that the Hon'ble Special Bench of ITAT has held as under ―13. The two assessee companies are public limited companies, therefore, they satisfied the first condition of 2(18)(b) namely, they are not private limited companies under the Companies Act. To be companies in which public is substantially interested they have to further satisfy conditions specified in Item ‗A‘ or in Item ‗B‘ of section 2(18)(b). Shares condition specified in Item ‗A‘. However, the shares of these assessee companies are held by Samudaya and Adavat. These are not private limited companies and there is no dispute that these shares held by them are not shares entitled to fixed rate of dividend; that the shares so held carry not less than 50 per cent of voting powers, and were unconditionally allotted to or acquired by Samudaya and Adavat; and that they were held beneficially throughout the previous years relevant to assessment year 1991-92 under consideration. But the question is whether Samudaya and Adavat are any of the entity mentioned in clause (a), (b) or (c) mentioned in Item ‗B‘ above. These are neither government nor corporation established by Central, State or Provincial Act. These are thus companies falling in the category of "Any Company to which this clause applies" not less than 50 per cent of their shares are held by SIFCO and Akash which are public limited companies and their shares are listed on Bombay Stock Exchange on the last day of the previous year as required by Item ‗A‘ because in other words, these are companies as specified in clause (b) of section 2(18) of the Act.

As assessee‘s shares carrying not less than 50 per cent voting powers are unconditionally allotted to or unconditionally acquired by Samudaya and Adavat and they held these shares beneficially throughout the previous year, the assessee companies are to be held as the companies in which public is substantially interested under section 2(18)(b) of the Act.

In view of the aforesaid discussions, we are of the view that there is no requirement in section 2(18)(b) to the effect that either parent company (SIFCO or Akash) should hold any shares or requisite shares in the 2nd subsidiary (assessee) or that the 1st subsidiary company (Samudaya or Adavat) should hold 100 per cent shares of the assessee. In our opinion, Samudaya and Adavat are companies to which clause (b) applies and since they held requisite number of shares in assessee companies, it would meet the requirement of being companies in which public is substantially interested.

It is true that Samudaya and Adavat are not companies to which this clause applies of its own and that they acquire that status by virtue of their being subsidiaries of SIFCO/Akash Agencies Ltd. but that cannot be a ground for holding that the second part of clause (c) becomes operative and therefore 100 per cent of its holding must be held by Samudaya and Adavat to make it eligible to grant the derivative status to the assessee in which it holds 50 per cent shares. We do not find any such condition that in order to be eligible to be a company "to which this clause applies" it has to have that status of its own and not by virtue of its being a subsidiary of another Company; nor that, otherwise it has to be a 100 per cent subsidiary of the holding Company to which this clause (c) applies. It would be reading something which is not there in the statute section 2(18)(b) of the Act. This, in our opinion, is not permissible on any principle of interpretation.

We also do not find any force in the submission of the Revenue that if the contention of the assessee is accepted then second part of clause (c) of the definition requiring 100 per cent holding by their parent company would become redundant as it could become a company to which this clause applies by mere holding of 50 per cent shares by virtue of the opening words of Part "B" of clause (c) itself. In our opinion, though, it may be that a company by acquiring shares carrying not less than 50 per cent of voting power, becomes subsidiary of the first mentioned company, yet, the different circumstances would ensue in both types of subsidiary companies and both the clauses of Item B could operate independently and to the exclusion of each other.‖

13 From the above, it is evident that the appellant has rightly contended that the decision of ITAT in the case of Ajax Investment Ltd (supra) is applicable to its case. The appellant has also invited my attention to the observations of Shri A Ramaiya in his Guide to the Companies Act, where following views have been expressed: "In respect of several sections of the Act where a private company is exempted, it is provided that the exemption will apply only in the case of private companies which are not subsidiaries of public companies. The reason for this is that a private company which is a subsidiary of a public company, is throughout in the Act put in the same position as a public company. For, where a private company is subsidiary of public holding company, it is controlled by the latter, and treated as having the characteristics of the holding company itself, enjoying the same privileges and rights and subject to the same restrictions, duties and liabilities. Its interests are the interests of the holding company and its acts are the acts of the holding company. Such a company is now statutorily declared as a public company for all the purposes under the Act in view of section 3(iv)(c) of the Act."

14 The above use of Shri A. Ramaiya further strengthen the claim of the appellant that ADIPL is a company in which public are substantially interested and hence the deposits received by the appellant from ADIPL cannot be deemed to be the taxable dividend income in the hands of the appellant as per the provisions of section 2(22)(e) of the Act. Thus, it is evident that even if the said inter-corporate deposits received by the appellant are treated to be in the nature of 'loans or advances', then also the same are not taxable in the hands of the appellant as deemed dividend

15 Coming back to the alternate claim of the appellant that the deposits received by the appellant from ADIPL are in the nature of inter-corporate deposits, and hence cannot be termed as 'loans or advances', I find merit in the arguments advanced by the ld. AR in this regard. The appellant had received Inter Corporate Deposits from ADIPL. ld. Assessing Officer has not given any reason either in her assessment order or in the remand report to substantiate as to why the sum of Rs 11.80 crores are not "inter-corporate deposits" and instead these are "loans and advances". "loans and advances" are not the same as deposits. Hon'ble Mumbai ITAT , in the case of Bombay Oil Industries reported in 28 SOT 383 (Mum) has held as under: ―From the above it is clear there is distinction between deposits vis-a-vis loans/advances. Section 2(22)( e) enacts a deeming fiction whereby the scope and ambit of the word dividend has been enlarged to bring within the situations enumerated in the section. Such a deeming fiction would not be given a wider meaning than what it purports to do. The provisions would necessarily be accorded strict interpretation and the ambit of the fiction would not be pressed beyond its true limits. The requisite condition for invoking section 2(22)( e) of the Act is that payment must be by way of loan or advances. Since there is a clear distinction between the inter-corporate deposits vis-a- vis loans/advances, according to us the authorities below were not right in treating the same as deemed dividend under section 2(22)(e ) of the Act. Since we hold that ICDs do not come within the purview of deemed dividend under section 2(22)( e) of the Act, the alternative contention of the assessee namely by virtue of section 2(22)(e )(ii) of the Act, the unsecured loans received by the assessee is not ‗dividend‘ is not adjudicated.

16 It is seen that in the case of the appellant, it is its subsidiary company ADIPL which has placed its funds with the appellant. It is not the appellant which are required ‗loans or advances‘ in the form of deposits. Therefore, in view of the above decision of Mumbai ITAT, it is evident that such inter- corporate deposits cannot be treated as ―loans or advance‘‘ so as to be covered by the provisions of section 2(22)(e) of the Act. Hence, respectfully following the above decision of the Hon‘ble Mumbai ITAT, I hold that the amount of Rs.11.80 crores received by the appellant as inter corporate deposits from ADIPL cannot be taxed as ―deemed dividend‖ as per the provisions of section 2(22)(e) of the Income Tax Act, . The addition made by the AO is therefore deleted‖

On a careful perusal of the analysis and discussions made by Ld CIT(A), we notice that the first appellate authority has examined the meaning of the expression ―a company in which the public are substantially interested ― within the meaning of the provisions of sec. 2(18) of the Act read with the relevant provisions of the Companies Act. There should not be any dispute that the provisions of sec 2(22)(e) are public are not substantially interested. Since the ADIPL does not fall in the category of ―company in which public are not substantially interested‖, we are of the view that the Ld CIT(A) was justified in holding that the provisions of sec. 2(22)(e) are not attracted.

In the result, the appeal filed by the assessee is treated as allowed for statistical purposes and the appeal of the revenue is dismissed.

DR, ITAT, Mumbai concerned गधर्ा पधईर / Guard file. 6. आदेशधनुसधय/ BY ORDER,सहधमक ऩंजीकधय (Asstt.