9911796707
TMI Blog2020 (3) TMI 466X X X X Extracts X X X X X X X X Extracts X X X X ..... areholder of the lender company in order to attract the provisions of section 2(22)(e) of the Act as held by the Hon ble Apex Court in the case of CIT vs. Madhur Housing and Development Company [ 2017 (10) TMI 1279 - SUPREME COURT] We are not in agreement with the conclusion of the lower authorities that the transaction by M/s. BTPL to assessee was sham. Therefore, we are inclined to hold that the provisions of section 2(22)(e) of the Act are not applicable in the present case and accordingly, we set aside the order of Ld. CIT(A) and direct the AO to delete the addition made under section 2(22)(e) of the Act. The ground no. 1 is allowed. Unexplained cash credit under section 68 - HELD THAT:- The assessee has taken preference share application money of 90.00 crores from M/s. BTPL who in turn borrowed this money from M/s. CISPL 71.00 Crores as loan and from M/s. Merind Ltd 19.00 as share application money which is also a group company. Thus identity of these companies are very much established as the assessee has filed all the necessary evidences before the authorities below as regards the genuineness of the transactions. We are of the view that since the source of money is not in do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n preferred against the order dated 14.02.2019 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2013-14. 2. The grounds raised by the assessee are as under: "On the facts and the circumstances of the case and in law, the learned CIT(A): A. Addition of preference share application money received amounting to ₹ 90,00.00,000/- as deemed dividend under section 2(22)(e) of the Act 1. erred in confirming the addition made by AO in respect of preference share application money received from Banneret Trading Private Limited (''BTPL'') as deemed dividend under section 2(22)(e) of the Act. 2. erred in holding that the preference share application money received from BTPL is similar to an unsecured loan; 3. erred in holding that the preference share application money provided by BTPL to the appellant is in the nature of any payment by BTPL on behalf of or for the individual benefit of shareholder i.e. Carol Info Services Limited ('CISL') and therefore covered by third limb to section 2(22)(e) of the Act without appreciating that Appellant is not the shareholder of BTPL; 4. failed to appreciate that the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BTPL) by treating the same as deemed dividend under section 2(22)(e) of the Act. 4. The facts in brief are that the assessee is a non banking finance company and filed return of income during the year on 26.09.2013 declaring total income at nil. Thereafter, the case of the assessee was selected for scrutiny under CASS and statutory notices were duly issued and served upon the assessee. During the course of assessment proceedings, the AO observed that assessee has received preference share application of ₹ 90.00 crores. Accordingly, the AO called upon the assessee to furnish the details of share application money along with the necessary documents/evidences. In response to the notice, the assessee submitted the board resolution and financial statements of the entity from whom the assessee has received preference share application money. The AO observed from the financial statements of M/S BTPL that during A.Y. 2013-14 the said company sustained loss of ₹ 29,529/-. The AO further observed from the balance sheet that the said entity M/s. BTPL has ₹ 1,00,000/- as share capital,₹ 77,193/- as negative reserve and surpluses, long term borrowings ₹ 736,28,23, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan of ₹ 194,57,88,998/- during the year by using the amount raised as preference share application money from M/S BTPL. Finally, the AO issued show cause notice to the assessee dated 16.03.2016 calling upon the assessee as to why ₹ 90.00 crores should not be considered as deemed dividend under section 2(22)(e) of the Act which was replied by the assessee vide letter dated 28.03.2016. The AO after considering the submissions of the assessee came to conclusion that M/s. BTPL is just a paper company having no creditworthiness and the transactions of investment in preference share of assessee company is not genuine. The AO also noted that the all these companies including assessee belonged to M/s. Wockhardt group. The AO concluded that since M/s. CISPL has given loans of ₹ 71.00 crores to M/s. BTPL who has further given the money as share application money to the assessee and thus virtual lending by M/s. CISPL to the assessee and therefore provisions of section 2(22)(e) of the Act has been clearly attracted. Similarly, The AO concluded that since M/s. Merind Ltd. has given share application money (₹ 19 crores) to M/s. BTPL who has further given the money as s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... records that "During the year under consideration, KHJPL has received preference share application money amounting to INR 90,00,00,000 from Banneret Trading Pvt. Ltd. ('BTPL'} and the same was outstanding as on 31 March 2013. The Id.AO treated the said preference share application money as deemed dividend under section 2(22}{e)." "It may be noted that the preference share application money has been received from BTPL which is not a registered shareholder of KHIPL. KHIPL is the registered shareholder of Carol Info Services Limited {'CISL'), which in turn holds 100% of the share capital in BTPL. The source of preference share application money is as under: iii) Loan received from CISL - INR 71 crores iv) Preference share application money received from Merind Ltd. - INR 19 crores" Prirna facie it is necessary to trace out the financial history of Carol arid the flow of funds from Carol to the Benneret and from Benneret to the assessee and others and from Merind to Benneret and from Benneret to Khorakiwala and look into reasons for such action on the part of Carol and Merind and then examine the applicability of section 2(22)(e} of the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, meaning thereby that the two employees of the company, that is, Mr. Subramanian and Ms. Nagwekar were not holding any shares of Benneret and signed as directors of Benneret without being share holder of the company which is not permissible under the Companies Act, 1956 and or Companies Act, 2013. Anyhow, Benneret being a group company immediately appears to have invested most of these 'Interest Free Loans of ₹ 736. 28 crores as 'Share Application Moneys in the three Group Companies, including ₹ 71 crores in Khorakiwala where it remained as outstanding as on the last date of the previous year, that is, 31 March 2013 similar to an unsecured loan.' It is highly probable that 'these shares were never issued till 31/03/2017 and these funds were shown as outstanding in share application money account of the respective parties, including Khorakiwala, since 'issuance of preference shares would have meant compliance with terms and conditions of the Companies Act 1956/2013 and SEBI relating to issuance of Preference Shares as is evident from the note number 8 to annual accounts of the assessee which reads as follows: 8. The Company has given share applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be ruled out. It is worth mentioning here that Merind Limited was a company in which public were not substantially interested as per the IT Act, 1961 and its 96.04 % shares were held by another group company Dartmour Holdings Private Limited as per the details mentioned in note number 19 (3) of notes to accounts of Merind Limited for the year ended 31 March 2013. These features are more or less common in the annual accounts of all the group companies whose copies of annual accounts are filed during appellate proceedings. Another feature which is noteworthy here is that 'loans running into crores of rupees were given either as interest free loans/advances and/or as 'Share Application Moneys' and these loans and advances remained as such and interest was not charged and shares were not issued for long time and ultimately these share application moneys were returned to subscribers. It is also observed from the annual accounts that the assessee was not even authorized during the previous year relevant to AY 2013-14 to officially increase its authorized share capital during the year of ₹ 16,60,800/- and following note attached to the note number 6 of the annual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious year, that is, 31/03/2013 which were utilized for making investments of ₹ 296.56 crores and giving short term loans and advances of ₹ 254.79 orores as on 01/04/2012 which were increased/reduced during the year to ₹ 320.91 crores and ₹ 29,69 crores respectively on which only ₹ 00.95 crores was earned by way of interest and ₹ 10.19 crores were expended as expenses thus making a commercial loss of ₹ 9.23 crores. The financial accounts clearly show that company's own funds consisting of reserves of ₹ 253.25 crores were used for investing in associate companies as follows: Wockhardt Limited ₹ 59.45 crores ( Equity shares ) Coral Info Services Limited ₹ 180.83 crores (Equity shares } Wockhardt Limited ₹ 80.00 crores (Preference Shares) Total ₹ 320.28 crores This is only the final picture, assessee has been indulging in changing its modes of deploying its funds, from investments to loans and advances and from advances and loans to investments, including giving funds by way of share application moneys. Similar are the facts in the case of Merind Limited which is said to. have transferred ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of crores of rupees of Carol Info and Merind to associate companies to deprive Carol and Merind of its legitimate source of income by way of interest and dividends to loss making companies like, the assessee and other two group companies Palanpur and Dartmour. Assessee's objection to the treatment of the loan/advance/share application moneys given by Benneret to Khorakiwala-assessee being treated as 'deemed dividend' is under the first part of the section 2(22)(e) of the IT Act 1961 which is squarely covered by the provisions of the section 2(22)(e) of the IT Act 1961 for the simple reason that ' payment of ₹ 90 crores made by Benneret to Khorakiwala - the assessee who holds 90.4% of shares of Carol Info which had given an interest free loan of ₹ 71 crores of Benneret, is nothing but a case of straight transfer of funds occurring on the same day, that is, 27/28 July 2012 from Carol to Benneret by loan, from Benneret to Khorakiwala as loan /advance /share application moneys and from Khorakiwala to Carol by way of investment in shares. Thus, interest free funds by way of loan/advance from Carol have gone back to Carol as share investments and thus the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... associate companies in the Khorakiwala Group to which were making/incurring commercial losses. This had two fold effect, one to transfer moneys by way of interest free loans/advances/share application moneys from cash rich companies of the group to reduce 'generation of income chargeable to tax' and hence reduce incidence of income tax on the cash rich company and generate income for the 'loss making company' to reduce its losses by either paying back its debts and hence reduce its expenses and/or invest interest free funds in revenue generating investments to generate income and absorb losses commercially and under the IT Act 1961 to reduce and avoid payment of income tax. Therefore, the entire facts of the case and other group companies clearly show that 'the entire restructuring exercise had only two main purposes, one to restructure the share holding in a way to retain control over the group companies and second to reduce and avoid payment of taxes under the specific provisions of the IT Act 1961'. Therefore, Supreme Court decision in the case McDonald & Co Limited v/s. CTO- 1985/22/Taxman/11 is squarely applicable to the facts of the case. In nutshell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company). Thus it becomes crystal clear from the reading of the third part of the clause of section 2(22)(e) of the IT ACT 1961 that 'any payment (₹ 90 crores) by any such company (Benneret) on behalf, or for the individual benefit, of any such shareholder (Carol Info- Total investment of Khorakiwala as on 31/3/2013 in Carol by way of shares-₹ 180.83 crores) ....' is nothing but 'a deemed dividend under section 2(22)(e) of the IT Act, 1961 since funds of ₹ 90 crores of Benneret have flowed back by way of loan/advance/share application moneys to the shareholder, Carol Info through the medium of its holding company, Khorakiwala by way of investment of ₹ 180.83 crores in carol info services limited". This is purely based on facts of the case and even if the payment of ₹ 90 crores treated as loan/advance and/or share application moneys, the words any payment mentioned in third part of the clause of section 2(22)(e) of the IT Act 1961 will squarely fall within the ambit of section 2(22)(e) of the IT Act 1961 and hence the 'pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 22.01.2016, a copy of which is attached at page No.103 to 128, filed copy of the resolution for accepting the share application money and also submitted the balance sheet as on 31.03.2015, confirmation and computation of income of M/s. BTPL. The Ld. A.R. submitted that in the balance sheet and notes to accounts of M/s. BTPL, it had declared the amount as paid to assessee as preference share application money. The Ld. A.R. submitted that similar share application money was also paid to other entities in the group and same were duly disclosed in the notes to accounts in the annual audited financial statements of M/s. BTPL. The Ld. A.R. submitted that on 07.03.2016 M/s. BTPL replied to notice issued by the AO under section 133(6) of the Act and filed the board resolution for making investments in the preference shares of assessee company beside furnishing memorandum of article association. The Ld. A.R. submitted that vide letter dated 10.03.2016 the assessee filed copies of ITR, computation of income, annual accounts and tax audited report of M/s. CISPL. The Ld. A.R. submitted that the assessee has used the said money for repaying the entire loan of ₹ 194,57,88,998/- taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y received as share application money was not in the nature of loans and advances for the purpose of invoking provisions of section 2(22)(e) of the Act. 10. The Ld. A.R. further argued that the deemed dividend under section 2(22)(e) of the Act can only be made if the lending company has accumulated profits, however, in the present case M/s. BTPL has accumulated loss of ₹ 77,183/- based on the audited financial statement as on 31.03.2013. The Ld. A.R. submitted that in absence of any accumulated profits in the hands of M/s. BTPL the preference share application money received from the M/s. BTPL can not be treated as dividend in the hands of the assessee section 2(22)(e) of the Act. 11. The Ld. A.R. stated that both the group companies M/s. CISPL and M/s. BTPL are in the business of giving loans and advances to the group companies. The Ld. A.R. without prejudice submitted that even if the amount paid by M/s. BTPL to the assessee is regarded as loan in the ordinary course of business, there should be no implication of provisions of section 2(22)(e) of the Act as M/s. CISPL and M/s. BTPL have advanced money in the ordinary course of business. The Ld. A.R. submitted that M/s. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey in its balance sheet and notes to accounts and these investment was duly made under the authorization of the board of directors as it was specifically resolved as is apparent from the board resolution. The Ld. A.R. also stated that the similar share application money was also paid to other group entities and same were part of the notes to accounts. The Ld. A.R. submitted that total amount paid as share application money was ₹ 755.00 crores out of which the amount pertaining to the assessee was only ₹ 90 crores. The Ld. A.R. submitted that M/s. BTPL has received total loans to the tune of ₹ 723.00 crores during the year out of which ₹ 71 crores was received from M/s. CISPL. Therefore, it can not be said that the said transaction was just to avoid deemed dividend under section 2(22)(e) of the Act. Countering the allegations by the lower authorities that M/s. BTPL was a sham company incorporated to avoid the tax , the Ld. A.R. submitted that M/s. BTPL was incorporated in the year 2008 and thus the allegation of the AO that M/s. BTPL is a sham company and was formed in order to carry out this transaction was wrong and against the facts on record. The Ld. A.R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 crores as deemed dividend under section 2(22)(e) of the Act after appreciating the fact that the source of money is flowing from the company in which the assessee holds 90.31% of the equity shares. The Ld. D.R. submitted that the money was transferred from M/s. CISPL to M/s. BTPL in which the former was holding 99% of the equity holding which means that assessee owns 90.3% of the equity shares in M/s. CISPL which holds 99% equity shares in M/s. BTPL meaning thereby that ultimately the assessee is beneficial owner of M/s. BTPL who has advanced money to the assessee in the guise of preference share application money. The Ld. D.R. submitted that out of ₹ 90.00 crores was invested by M/s. BTPL in the assessee, ₹ 71.00 crores was received from M/s. CISPL as loan and ₹ 19.00 crores was received from M/s. Merind Ltd. Thus whole transaction was a part of the planning done by the assessee to circumvent the provisions of section 2(22)(e) of the Act. Countering the arguments of the Ld. A.R. that M/s. BTPL has no accumulated profit, the Ld. D.R. submitted that admittedly M/s. BTPL has no accumulated profit but the company from which the funds were flowing i.e. M/s. CISPL h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee shows that the whole transaction was laid out in such a manner to circumvent the provisions of section 2(22)(e) of the Act. The Ld. D.R. submitted that the M/s. BTPL was a paper company and as is apparent from the fact that the said company is not having any net worth or business activity during the year and it has only borrowed money from the group companies and advanced the same intra group. The Ld. D.R. referred to the statement recorded under section 131 of the Act of Mr. A Shiva Subramanian, director of M/s. BTPL who submitted in reply to question No.14-18 that M/s. BTPL was not into any active business and was only used to transfer the funds from M/s. CISPL to other group companies. Therefore, in the present case, the facts are clearly distinguishable wherein the AO has made addition in the hands of the assessee who is shareholder of M/s. CISPL who has actually advanced the money through M/s. BTPL. In view of these facts, the Ld. D.R. submitted that the arguments of the assessee deserved to be rejected. The Ld. D.R. submitted that Ld. Counsel of the assessee has also relied on some case laws of various High Courts and Tribunals, however, they not applicable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. CISPL as a loan and ₹ 19 crores as share application money from M/s. Merind Ltd. another group company. Thus assessee has received only ₹ 90.00 crores as preference share application money which was used for repayment of loan taken by the assessee from M/s. CISPL in earlier years. In the balance sheet and notes to accounts of M/s. BTPL. The said company has declared the amount paid/invested in group company to the tune of ₹ 755.00 Crores including the assessee's company as preference share application money of ₹ 90.00 crores. M/s. BTPL has also replied to the notice under section 133(6) of the Act issued by the AO to verify the said share application money by submitting and furnishing the copy of board resolution authorizi1111ng the making of investments in the shares of assessee besides filing copy of memorandum and articles of association. During the year the assessee has repaid the entire loan of ₹ 194,57,88,998/- taken from M/s. CISPL in A.Y. 2008-09 and this ₹ 90 crore was also utilized in the repayment of loan as stated above. The AO treated the preference share application money received by the assessee of ₹ 90.00 crores as dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not applicable where the assessee is not a shareholder in the lender company. In this case the assessee received advance from M/S Jupiter Capital Pvt. Ltd. The assessee was a shareholder with 95% shareholdings in M/S Vectra Holdings Pvt. Ltd. which in turns was holding 99.90% in Jupiter Capital Pvt. Ltd. The addition was made by the AO u/s 2(22)(e) of the Act in the assessee hand on the ground that assessee is beneficiary of dividend in Vectra Holdings Pvt. Ltd. which in turn is beneficiary of dividend from Jupiter Capital Pvt. Ltd. and he can be held beneficial or actual owner of the shares of Jupiter Capital Pvt. Ltd. The tribunal held that the assessee is not the shareholder in the lender company and therefore provisions of section 2(22)(e) are not applicable which was affirmed by the Hon'ble High Court. c)In the case of CIT vs. Pravin Bhimshi Chheda (supra) Hon'ble Bombay High Court has held that circuitous transfer of funds to shareholders was not deemed dividend if company got back its funds on the same day. It was held that provisions of section 2(22)(e) of the Act has to be construed strictly. d). Similarly, the Hon'ble Bombay High Court in the case of HDFC vs. ACIT (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sses of ₹ 77,183/- as per the audited financial statement as on 31.03.2013 and in view of the said accumulated losses in the hands of M/s. BTPL, the preference share application money received by the assessee from M/s. BTPL can not be treated as deemed dividend in the hands of the assessee. The contentions of the department that the holding company i.e. M/s. CISPL was having sufficient accumulated profits has no meaning and is not a valid argument as the money is lent by M/s. BTPL and not by M/s. CISPL. Accordingly, the said arguments of the Department are also not accetable. We have also examined the balance sheet of M/s. CISPL and M/s. CISPL and observed that both these companies are in the business of making loans and advances to the group companies. Even if we presume that amount paid by M/s. BTPL to assessee is a loan, the provisions of section 2(22)(e) of the Act have no implication as M/s. CISPL and M/s. BTPL have advanced money in the ordinary course of business and is not a solitary transaction. This is clear from the fact that M/s. CISPL out of total assets of ₹ 911.00 crores as on 31.03.2013, ₹ 749 crores were represented by loans and advances to the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atio has been laid down in other decision namely ITO v. Ajay Dilkhush Sarupriya (supra), CIT vs. Parle Plastics Ltd. (Bombay HC) (supra) and Ravi Agarwal v ACIT (Allhabad HC) (supra). Therefore, even on this score the order passed by the Ld. CIT(A) can not be sustained. 17. We are also not in agreement with the conclusion drawn by the lower authorities that the transaction of receiving preference share application money from M/s. BTPL are sham transactions. In this case, we observe that money has been invested by M/s. BTPL in the assessee to the tune of ₹ 90.00 crores which is a part of the total money invested by M/S BPTL in other group company to the tune of ₹ 755.00 crores. Thus to say that this is a sham transaction is also wrong as the same is duly authorised by the decision of the board of directors as evidenced by the board's resolution and duly accounted in the books of accounts, stated in the annual accounts as well as notes to accounts of M/S BPTL. The source of money is clearly vouched and verified as M/s. BTPL has received ₹ 71.00 crore from M/s. CISPL and ₹ 19.00 crore from M/s. Merind Ltd. We also do not find any merit in the arguments of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f law and were not to be held as sham. Similarly, in the case of Porrits and Spencer (Asia) Ltd. vs. CIT (supra) the court has held that once the transaction is held to be genuine merely because it has been entered into with a motive to avoid tax, it would not become a colourable devise and consequently earned any disqualification. In the case of CIT vs. Wallport Shares and Share Brokers Pvt. Ltd. (supra) the Hon'ble Supreme Court has held that where the assessee was purchasing dividend bearing unit and selling them at a loss after receiving a dividend, the same can not be held as a sham transaction by observing and holding as under: "Even assuming that the transaction was pre-planned there is nothing to" impeach the genuineness of the transaction. With regard to the ruling in Mc Dowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC), it may be stated that in the later decision of this Court in Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 it has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of this C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llate proceedings the appellant's AR also filed certain documents which constitute additional evidence in relation to ground no,6 raised has been considered but in view of the decision on round no. 5 above, these documents have now become not relevant. In view of this, considering the facts and circumstances of the case this ground of appeal is not adjudicated." 21. After hearing both the parties and perusing the material on record and as already noted by us, all the three companies M/S CISPL , M/S BTPL and the assessee are group companies of M/s. Wockhardt Ltd. and there is no doubt as to the identity of these companies, genuineness of the transaction and creditworthiness of the investor and also the source of source. The assessee has taken preference share application money of ₹ 90.00 crores from M/s. BTPL who in turn borrowed this money from M/s. CISPL ₹ 71.00 Crores as loan and from M/s. Merind Ltd ₹ 19.00 as share application money which is also a group company. Thus identity of these companies are very much established as the assessee has filed all the necessary evidences before the authorities below as regards the genuineness of the transactions. We a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the year. The Revenue has also challenged the order of Ld. CIT(A) on this issue of deleting the additional disallowance of ₹ 1,70,51,001/- made by the AO under section 14A read with rule 8D in ITA No.3348/M/2019 a cross appeal filed by the Revenue. 23. By adjudicating this ground ,the appeal of the Revenue will also be disposed of as the same issue is involved in respect of deletion of disallowance under section 14A read with rule 8D. 24. The facts in brief are that during the year the assessee has earned exempt income by way of dividend of ₹ 7,02,745/- and claimed the same as exempt. The AO noticed that assessee has made any suo-motto disallowance under section 14A read with rule 8D of ₹ 7,71,04,511/- and accordingly vide notice dated 11.01.2016 asked to explain the as to why disallowance should not be made as per section 14A read with rule 8D. In response, the assessee filed letter dated 22.01.2016 submitting the working of disallowance under section 14A read with rule 8D wherein the disallowance was worked out at ₹ 7,71,04,511/-. However, the AO rejected the working of the assessee and deworked the disallowance under section 14A at ₹ 8,09,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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