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TMI Blog2006 (4) TMI 351X X X X Extracts X X X X X X X X Extracts X X X X ..... e, we propose to dispose off all the grounds raised by the appellant. 2. The facts of the case are as follows : "( i )A partnership firm was formed on 6-9-1995. The land belonging to the partners were contributed as capital by the partners. ( ii )This partnership firm was converted into a company by following the procedure laid down in Part IX of Companies Act, 1956. ( iii )Article 51 of the Articles of Association states that company may by a resolution passed at General Meeting frame Rules for construction, allocation or allotment of constructed area to the members of the company. It also authorised the members to frame a scheme for allocation. Article 52 empowers the Board of the appellant to decide the number of shares a member shall acquire and the deposit to be maintained by such member with the company for enabling such member to be allotted such constructed area. Article 53 entitles the members who have been allotted constructed area to possess, exploit and enjoy the usufruct therefrom. Article 54 permits him to lease, let-out, mortgage, hypothecate, create charge or lien over these deposits and also to dispose off in any manner right over the constructed area al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count as on 31-3-2003 is Rs. 1,60,00,000 and the same amount is shown as outstanding on 31-3-2002 also. The rent deposit received from Samsung amounting to Rs. 2,40,00,000 was distributed to the shareholders." 3. The Assessing Officer held that rental income is to be assessed in the hands of appellant. He did not agree with the contention of the appellant that section 27( iii ) of the Act applies to it. He laid great stress on the fact that the agreement was entered into with Samsung by the appellant and the investment was made by the company and not by the shareholders. He also held that the appellant company is not a party to the resolution passed in the EGM held on 7-8-1998. The ownership over the building continued to vest with the appellant and this ownership has not been transferred to individual shareholders. He therefore, held that the appellant is not only the legal owner but also the beneficial owner. The appellant is held liable to pay dividend distribution tax on the amount of rent distributed. He also held that the amount so distributed though debited to Profit and Loss Account cannot be deducted from the book profit. 4. The appellant carried the matter in appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se in Ranka Construction (P.) Ltd. ( supra ) and the facts of the present case are similar. ( d )Articles 51 to 56 clearly recognize that the shareholder can deal with the property as they deem fit. ( e )The resolution passed in the EGM and the shareholders agreement clearly specify that the individual units of the building be allotted to shareholders. Para 23.2 of Board Circular No. 495 dated 22-9-1997 [168 ITR (St) 87] clearly applies to the facts of the present case. ( f )The company cannot be a party to the resolution passed by its members in EGM. Therefore, the fact that the company was not a party and hence resolution cannot be taken into account as held by lower authority is not material. The agreement and the EGM resolutions clearly effectuate the scheme. The agreement with Samsung was entered into by the appellant only as a matter of convenience and nothing more should be read into it. In any case, Memorandum of Understanding recognizes the right of shareholders to receive rentals. ( g )The reference to the Memorandum of Association by the lower authority to say that it is appellant who has to construct and let-out properties is not valid in law. He relies on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i). He also relied on the Delhi High Court s decision in D.C. Anand Sons v. CIT [1981] 131 ITR 77 to say that the principle of diversion of income by overriding title does not apply to section 22. ( c )As regards the submissions of the appellant that individual shareholders have been assessed on the same rental income, it was submitted that assessment on income in the hands of a wrong person cannot be a bar in assessing the income in the hands of the person who is ought to be taxed. ( d )The company by passing the necessary entries in the books of account has invested in the construction. To apply section 27( iii ) it is necessary that the investments should be made by the shareholders and not by the company. ( e )The amounts paid to the shareholders are dividends and the Assessing Officer has rightly levied tax under section 115-O of the Act. ( f )Since the amounts paid to shareholders are dividends, the same cannot be deducted from the book profits. 8. We have heard both sides and perused the materials on record. Before deciding the legal issue, it is necessary to give our finding on the factual disputes. The Assessing Officer states that the investment has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii ) stipulates that, among other things, a member of the company to whom a building or part thereof is allotted under the house building scheme is deemed to be the owner. Once he is deemed to be owner irrespective of the fact that the legal ownership continues to vest with the company, we fail to understand as to how the company can be assessed under section 22 of the Act. 11. The entire scheme starting from the formation of the company, the relevant articles of association, the resolutions passed in EGM and shareholders agreement fall under the house building scheme referred to in section 27( iii ). We do not agree with the finding of the Assessing Officer that the shareholders are entitled only to usufruct of the building. As pointed out by the learned Counsel for the appellant, articles 53 and 54 confer an unfettered right over the constructed area to the shareholders. In fact article 54 refers to leasing, letting-out, mortgage, hypothecate or create charge or lien over the constructed area or dispose off the right over constructed area. Article 53 grants the right of possession. These are the rights which are enjoyed by a beneficial owner. The Hon ble Supreme Court in P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of appellant rather than the department. 14. The learned Departmental Representative relied on the decision of Rajasthan High Court in S. Kartar Singh s case ( supra ) to state that principle of diversion of income by overriding title does not apply to section 22. We find that in S. Kartar Singh s case ( supra ) there was a transfer of income by the legal and beneficial owner without transferring the assets. Obviously in such cases section 16 of 1922 Act or section 60 of 1961 Act would apply. We do not find anything in the judgment to say that the principles of overriding title are not applicable to section 22. Similarly, in D.C. Anand Sons case ( supra ), the Delhi High Court proceeded on an uncontroverted finding of fact that there was nothing to show that income from property was diverted by assessee by overriding title. The decision is also not applicable to facts of the case. 15. The reliance on Memorandum of Association to buttress the stand of the Department is clearly misplaced. It is well-settled that the objects clause of the Memorandum of Association do not determine the character of income. One has to apply the provisions of Income-tax Act and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by company in general meeting. Unless and until it is so declared, no shareholder has any claim against the company in respect of it. The usual practice is for the Board of Directors to recommend and the AGM to declare dividend. Therefore, the distribution of rentals is not declaration of dividend as understood under the Companies Act. In present case, no such steps have been taken. 19. We also feel that the same does not fall within the definition of section 2(22) of Income-tax Act. On the facts of the case, clauses ( b ) to ( e ) of section 2(22) do not apply. The only question is whether any distribution of accumulated profits entailing the release of assets of the company has taken place to fall under clause ( a ) of section 2(22). In our opinion, in order to attract clause ( a ) first it must be proved that the company has earned profits. In order to apply section 2(22)( a ), first it must be proved that the company has earned profits. Such profits must be commercial profits. The amount received by a company with an overriding obligation to distribute it to shareholders as per scheme referred in section 27( iii ) of the Act gets diverted at source. It cannot be treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Schedule VI to the Companies Act, 1956. Hon ble Bombay High Court in the case of CIT v. Veekaylal Investment Co. P. Ltd. ( 249 ITR 597 ) held that if the profit is not computed in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956, the Assessing Officer has power to recompute such book profits. Thus, it can be held that if the Assessing Officer can amend the book profit if it is not in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956, likewise, the assessee also can recomputed the book profit for the purpose of section 115JA. Since in the present case, the entire income by way of interest on zero coupon bond has not accrued during the year, the same cannot be considered as "to disclose the result of working of the Company during the financial year" as provided under Part II and Part III of Schedule VI to the Companies Act, 1956. We accordingly hold that the notional income by way of interest on zero coupon bonds has to be excluded while computing book profits as per section 115A of the Act." 22. Following the aforesaid decision, we hold that there are no book profits to be taxed under section 115JB of the Act for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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