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TMI Blog2017 (6) TMI 293X X X X Extracts X X X X X X X X Extracts X X X X ..... olkata Benches in the case of REI Agro Ltd. Vs DCIT [2013 (9) TMI 156 - ITAT KOLKATA] which has since been approved by the Hon’ble Calcutta High Court. We therefore confirm the order of the CIT(A) and dismiss Gr.No.2 raised by the revenue. - I.T.A No. 423/Kol/2014 - - - Dated:- 2-6-2017 - Sri N.V.Vasudevan, JM And Shri Waseem Ahmed, AM For The Appellant : Shri Niraj Kumar, CIT(DR) For The Respondent : Shri S.Jhajharia, FCA ORDER Per N.V.Vasudevan, JM This is an appeal by the Revenue against the order dated 16.12.2013 of CIT(A)-Central-I, Kolkata, relating to AY 2009-10. 2. Ground No.1 raised by the revenue reads as follows :- 1. That, on the facts and in the circumstances of the case, the CIT(A) has erred in deleting the addition of ₹ 10,20,00,000/- made by the AO u/s 2(22)(e). 3. The Assessee is a company engaged in the manufacture and sale of jute goods. In the course of assessment proceedings u/s 143(3) of the Income Tax Act, 1961 (Act) the AO noticed that the assessee had during the previous year accepted the loans of ₹ 10,20,00,000/- from M/s. Mega Resources Ltd. It is not in dispute that the Assessee held shares in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 previous year, beneficially entitled to not less than twenty per cent of the income of such concern; Section 2( 32 ) defines the expression person who has a sub- stantial 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 per cent of the voting power. 4. Section 2(22)(e) of the Act has the following three limbs :- 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. Seco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-holding of the subsidiary company in computing the voting power of the assessee company. I find that the AO has not even discussed the issue in his assessment order. The AO has' simply stated that the assessee company and its subsidiary company together held more than 10% of the voting power; and then, invoked section 2(22)(e) to assess the loan of RS.-10.20 crores as dividend income in the hands of the assessee. The Ld AR has contended that section 2(22)(e) was not applicable in the case of the assessee company as it was holding only 1.7% of the voting power in the lending company M/s Mega Resources Ltd. I find merit in the contention that the AO has erred in law as well as on facts in adding-up the share holding of the subsidiary company for computing the voting power of the assessee. I find no basis or justification (in fact, the AO has not given any in his assessment order) for considering the combined share-holding of the assessee company and its subsidiary company to conclude that the assessee was holding more than 10% voting power in the lending company. I am of the opinion that the AO has misconstrued the provisions of section 2(22)(e). The requirement of section 2(22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the karta is a member of the HUF and therefore the shareholding of the karta should be held to be on behalf of the HUF. Therefore the conditions for applicability of provision of section 2(22)(e) of the Act were attracted. We are of the view that the aforesaid decision has no application to the facts of the present case as the share holding of the assessee and share holding by its subsidiaries cannot be equated as to a case of shares held by Karta of a HUF in his capacity as Karta of HUF. The ld. DR also brought to our notice that the Hon ble Supreme Court in the case of CIT vs Namdhari Seeds [2017] 79 taxmann.,com 124(SC) has admitted SLP of the Revenue and has framed the following question of law for consideration: whether High Court was justified in holding that it is only when payments are made by a company by way of advance or loan to a shareholder or payment to a concern in which shareholder is a member or partner and in which he has substantial interest, said amount of loan would be regarded as deemed dividend within meaning of section 2(22)(e). 8. In our view the aforesaid circumstance viz., SLP being admitted on a question of law has no bearing whatsoever in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is partly a verb and partly an adjective. In section 2(22)(e ), the present participle being is used to describe the noun shareholder like an adjective. The expression being a person who is the beneficial owner of shares is, therefore, a further requirement before a shareholder can be said to fall within the parameters of section 2(22)(e ). In the 1961 Act, section 2(22 )(e) imposes a further condition that the shareholder has also to be 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. Thus, it was not possible to accept the contention of the revenue that under the 1961 Act there was no requirement of a shareholder being a registered holder and that even a beneficial ownership of shares would be sufficient. 10. In view of the aforesaid decision, we are of the view that the Assessee was a registered and beneficial shareholder of shares of M/S.Mega Resources Ltd., that conferred voting rights of only 1.7%. It is only this share holding that has to be considered for applying the first limb of Section 2(22)( e ) of the Act and the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yielded tax free income during the relevant previous year. In other words, the AO while computing the disallowance under rule 8D(iii) should consider only those investments that have yielded tax free dividend income during the year. I find from the assessment order that the assessee has earned dividend income of ₹ 4,00,200/- during the relevant year. Following the above decision of the jurisdictional ITAT, the AO is directed to compute the disallowance under rule 8D(iii) by restricting to those investments that have yielded tax free dividend income during the year. Ground no 5 is decided accordingly. 14. Aggrieved by the order of CIT(A) the revenue has raised ground no.2 before the Tribunal. 15. We have considered the rival submissions. As far as the disallowance u/r 8D(2)(iii) is concerned, we are of the view that the CIT(A) s direction to direct the AO to consider, while working out the average value of investments, only investments that yielded tax free income is correct and is line with the decision of the ITAT, Kolkata Benches in the case of REI Agro Ltd. Vs DCIT in ITA No.1331/Kol/2011 order dated 19.06.2013 which has since been approved by the Hon ble Calcutta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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