TMI Blog2020 (3) TMI 466X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 doubt and even the source of source has been explained thus the transactions in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the other by the Revenue have been 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 shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce share application money received from Banneret Trading Pvt. Ltd. (hereinafter referred to as 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money received was huge of ₹ 90.00 crores. The AO also recorded a finding that assessee has repaid 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: I have considered the facts of the case, submissions made by the appellant, it is seen from the 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akiwala Group Of Companies, however they were all acting in tandem as is evident from date of board resolutions. It has been submitted by the assessee's CAs in letter dated 10 January, 2019 that 'Carol Info was holding 100% shares of Benneret, 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 compli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs from the annual accounts for the year ended 31 March 2013 that 'similar transactions were made in all the group companies in earlier assessment years as well and possibility of similar transactions having been made in future assessment years also 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L Account and Balance Sheet of the assessee for previous year relevant to AY 2013-14 that assessee had borrowed amounts totalling ₹ 429.32 crores as on first day of previous year, that is, 01/04/2012 which came down to ₹ 23.61 crores as on last day of previous 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diary of the assessee, that is, Khorakiwala through the medium of Benneret to the assessee, that is, Khorakiwala and it squarely falls within the provisions of section 2(22)(e) of the IT Act 1961. Prima facie a fagade of making investments by way of 'share application money' was created during July 2012 to transfer funds from Carol Info and other group companies to three group companies to utilize the free reserves running into hundreds 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectors to exercise control over the restructured companies. And similar type of transactions were undertaken in all the connected/associate group companies in a planned manner knowingly. Therefore what has to be seen is not the form but the substance and if the corporate veil is pierced, it will appear that funds were transferred from companies with 'accumulated profits' within its meaning under section 2(22)(e) of the IT ACT 1961 to the group/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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company. (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off; (v) any distribution of shares pursuant to a demerger by the resulting company 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said company. The Ld. A.R. submitted that money received by the assessee as preference share application money from M/s. BTPL can not be treated as deemed dividend in the hands of the assessee in absence of any share holding in M/s. BTPL. The Ld. A.R. submitted that in order to invoke the provisions of section 2(22)(e) of the Act, the assessee has to be registered and beneficial shareholder of the lender company. The Ld. A.R. submitted that the assessee vide letter dated 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the following decisions: 1. CIT vs. Vikas Oberoi (2017) 394 ITR 505 (Bom)(HC) 2. CIT Vs Alpex Exports (P) Ltd (2014)361 ITR297 (Bom) 9. The ld AR argued that in absence of any Law , the equity transactions cannot be re-characterised or treated as debt by relying on the decision of jurisdictional High Court in the case of DIT (International Transactions) Vs Besix Kier Dabhol SA (2012) 210 Taxman 151. The Ld. A.R. submitted that in the above decision it has been held that money 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be invoked to the funds advanced by M/s. BTPL to the assessee. In defence of his arguments, the Ld. A.R. relied on following decisions: i) CIT vs. Jayant H. Modi (2015) 232 Taxman 337 (Bom.) (HC) ii) ITO v. Ajay Dilkhush Sarupriya (2015) 70 SOT 449 (Mum.)(Trib.)- iii) CIT v Parle Plastics Ltd. (2011) 332 ITR 63 (Bom.)(HC) iv) Ravi Agarwal v ACIT (2016) 287 CTR 581 (A11.)(HC) 12. The Ld. A.R. argued that since M/s. BTPL had declared the amount paid to assessee as share application money 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 fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of section 2(22)(e) of the Act are not applicable as (i) the preference share application money is not in the nature of loan, (ii) M/s. BTPL has no accumulated profit and M/s. CISPL and M/s. BTPL are in the business of borrowing and advancing to group companies and (iii) the transactions are not sham transactions as has been held by the AO. 13. Per contra, the Ld. D.R. relied heavily on the order of Ld. CIT(A) and AO by submitting that the Ld. CIT(A) has rightly confirmed the addition of ₹ 90.00 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CISPL to the assessee via indirect root wherein the assessee is a shareholder. The Ld. D.R. submitted that the direct transfer of money by M/s. CISPL to the assessee would have covered the transaction directly under the provisions of section 2(22)(e) of the Act and therefore the assessee used a colourable device of introducing a paper company in the middle i.e. M/s. BTPL wherein the assessee was not having any shareholding. The Ld. D.R. submitted that money was first transferred by M/s. CISPL to M/s. BTPL and then 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties and perused the material on record including the written submissions filed by both the sides. The undisputed facts are that the assessee is a holding company owning 90.31% of equity shares of capital of M/s. CISPL and M/s. CISPL further holds 99% of the equity share capital of M/s. BTPL. All these companies are group company of M/s. Wockhardt Ltd. During the year, the assessee received preference share application money of ₹ 90.00 crores from M/s. BTPL out of money received ₹ 71.00 crores from 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra) the Hon ble Bombay High Court has held that the individual assessee is not a shareholder of M/s. NS Fincon Pvt. Ltd. from whom the assessee has received the loan. Another entity M/s. Law Financial Services Pvt. Ltd. had advanced money to M/s. NS Fincon Pvt. Ltd. The Hon ble High Court has held that the provisions of section 2(22)(e) of the Act are not applicable. b)In the case of Pr. CIT vs. Rajeev Chandrashekhar (supra) the jurisdictional High Court has held that provisions of section 2(22)(e) of the Act are 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions can not be recharacterised as debt by the Income Tax Department and consequently the provisions of section 2(22)(e) of the Act could not be held to be validly invoked in the case of the assessee. 16. On the issue of addition on account of deemed dividend under section 2(22)(e) of the Act in the hands of the assessee to the extent of accumulated profit of the lending firm we have examined the audited annual accounts and found that the said company was not having any accumulated profit and there were in fact accumulated losses 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of share and stock brokers. The Hon ble Bombay High Court has held that maximum amount of loan advanced by the company during the year under consideration was to the tune of ₹ 95,45,000/- which constitute 33% of the total funds available with the said company and thus upheld the order of Tribunal wherein the Tribunal has concluded that lending money is a substantial part of business of M/s. JMC Securities Pvt. Ltd. and upheld the order of the Tribunal wherein the Tribunal deleted the addition of deemed dividend. Similar ratio 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will-o - the-wisp. Similarly, in the case of Vodafone International Holding BV vs. UOI(supra), the Hon ble Court has explained the correct interpretation of Mc Dowell Co. Ltd. (supra) that legitimate tax planning can not be considered as sham. In the case of CIT vs. Head Day Consultancy Pvt. Ltd. (supra) the Hon ble Bombay High Court has held that where the share of a sister concern was sold at a loss to reduce the profit on sales of stock exchange, the transactions were not a legitimate as the transactions were within the four corner of 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: Ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ea that the issue has been decided against the assessee on the main ground. The ld. CIT(A) observed and held as under: With regard to ground No.6 of the appellant wherein it has objected to the AO s alternative view that the amount of ₹ 90 crores was received from the above mentioned parties constitutes unexplained cash credit u/s 68 of the Act, it is held that the undersigned has decided the ground of appeal no. 5 against the appellant and hence this ground of appeal no. 6 has not been adjudicated. It is to be mentioned here that during the appellate 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be treated as cash credit. Considering the fact of the case in the light of various decisions as discussed hereinabove we are inclined to hold that the preference share application money of ₹ 90.00 crores received by the assessee can not be brought to tax as unexplained credit under section 68 of the Act. Accordingly the ground no.2 is allowed. 22. The 3rd issue raised by the assessee in its appeal is against the order of Ld. CIT(A) not restricting the disallowance under section 14A of the Act to the amount to exempt income earned by way of dividend during 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 not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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