2015 (2) TMI 951 - HC - Income Tax

Non deduction of TDS - assesse in default - initiation of proceedings against the assessee in default who does not deduct tax as held by revenue - whether proceeding under Section 201 is barred by time? - Held that - Ruling of this Court as to the period of limitation, i.e., Commissioner of Income Tax v. NHK Japan Broadcasting Corporation, (2008 (4) TMI 182 - DELHI HIGH COURT) and CIT Vs. Hutchison Essar Telecome Ltd. (2010 (4) TMI 45 - DELHI HIGH COURT) concludes the issue wherein ruled that the foundational requisite for initiation of proceedings under Section 201 is a period of four years if no limitation is prescribed. An added reason why the submission of the Revenue is unacceptable is that had the Parliament indeed intended to overrule or set aside the reasoning in NHK Japan (supra), it would have, like other instances and more specifically in the case of Section 201 (1A), brought in a retrospective amendment, nullifying the precedent itself. That it chose to bring Section 201 (3) in the first instance in 2010 and later in 2014 fortifies the reasoning of the Court. - Decided against the Revenue. Deemed dividend - Merits the applicability of Section 2 (22) (e) - Held that - If a person is a registered shareholder but not the beneficial shareholder then the provision of section 2 (22) (e) will not apply. Similarly, if a person is a beneficial shareholder but not a registered shareholder then also the first limb of the provisions of section 2 (22) (e) will not apply. Concededly in the present case the individual Harjit Kaur was not a shareholder of the present assessee but rather the shareholder of another concern which held shares in assessee company. is, therefore, clear that in the absence of any finding that Harjit Kaur owned the shares in terms of Section 201A or was beneficial owner in terms of such provision - on both counts - the findings being adverse to the Revenue - Decided against the Revenue.

Summary

Issues:
1. Initiation of proceedings against the assessee for default in tax deduction.
2. Applicability of Section 2 (22) (e) on the merits of the case.

Initiation of Proceedings:
The judgment concerns appeals against the ITAT's decision for the Assessment Years 1999-2002. The Revenue sought to initiate proceedings against the assessee for not deducting tax and applying Section 2 (22) (e) on a shareholder who borrowed from the assessee. The AO argued that as the shareholder had more than 10% stake in the assessee, it constituted deemed dividend. However, the CIT (A) and ITAT accepted the assessee's contentions. The Revenue's appeal emphasized that Section 201 imposes no limitation and the shareholder was a direct beneficiary, justifying invoking Section 2 (22) (e).

Limitation Period and Precedents:
The counsel for the assessee cited precedents like NHK Japan and Hutchison Essar Telecom to argue that proceedings under Section 201 must adhere to a four-year limitation. The Court noted the importance of limitation in exercising powers under Section 201. The judgment in NHK Japan was partially affected by amendments to Section 201, but the Court upheld the necessity of a limitation period for initiating proceedings. The Court also referenced the Bhatinda District case to emphasize the need for a reasonable period for exercising jurisdiction.

Merits of Section 2 (22) (e):
The Court analyzed the applicability of Section 2 (22) (e) based on precedents like National Travel Service and Ankitech. It was established that the shareholder in question was not directly associated with the assessee and did not meet the pre-conditions of being a beneficial owner of shares. The judgment emphasized that legal fiction in deeming provisions should not extend to broadening the concept of shareholders. The Court concluded that the Revenue's arguments regarding the applicability of Section 2 (22) (e) lacked merit.

Conclusion:
The Court dismissed the appeals, ruling against the Revenue on both the initiation of proceedings and the applicability of Section 2 (22) (e) on the merits. The judgment highlighted the importance of limitation periods in tax proceedings and the need to satisfy pre-conditions for deeming provisions to apply.