TMI Blog1994 (2) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... rces of acquisition of these two lots were explained by the appellant as from loan of Rs. 45 lakhs and Rs. 25 lakhs taken from JCPL on6-6-1988and15-6-1988respectively. JCPL had received two loans of Rs. 50 lakhs each on6-6-1988and15-6-1988respectively from MLL, out of which, JCPL had advanced Rs. 72 lakhs to the appellant and the balance was advanced to the appellant's wife. It was with the help of these loans that, the appellant managed to acquire the shares of MLL. The appellant became a director of MLL on23-5-1988. The assessee had placed the entire lot of 10826 shares with MLL for transfer in his favour on24-6-1988and these shares were registered in favour of the appellant in the Register of Members of MLL on8-7-1988. 3. The appellant is neither a promoter nor a shareholder of JCPL. JCPL was formed in 1985 by Mr. Jagmohan Seth and Smt. Uma Rani. JCPL from its formation till Sept. 1987 was inactive and on23-9-1987, Mr. Mohd. Sahid Mr. Mohd. Sabail were made directors of JCPL. Mr. Mohd. Sahid was a practising Chartered Accountant, and was adviser to the appellant's business interests. The Balance Sheet of MLL showed accumulated profits of Rs. 67,37,712. 4. The Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not recognise the appellant as a shareholder, the conclusion of the Assessing Officer was bad. This was so argued as an alternative, i.e., even if JCPL is eliminated from the scene. It was stated that, JCPL is an independent assessee, who was being assessed for interest income from the loans granted by it. It was contended that JCPL acting as an intermediary for the loan had made a net gain 1% in the transaction, i.e., by advancing the loan at 13% interest and receiving the loan at 12% interest. This fact, according to the appellant exhibited a relevant business consideration, which cannot be easily brushed aside. 6. The assessee had further contended that, the sellers Ramchandani family had prohibited him from getting the shares registered in his favour, till the full consideration for the shares was paid to them. It was for this reason that, the shares had continued to be registered in the names of Ramchandani family till6-7-1988, after which it got transferred in favour of the company. The effort made by the revenue department to tax the sum of Rs. 63,70,000 as deemed income in the hands of Mrs. Monika Ramchandani fell through because, the department had issued the not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, the assessee is in no way related to the directors of JCPL and there is nothing on record to suggest that, the assessee had any control over JCPL, because, the assessee nor any of his family members hold any shares in that company or are directors of that company. He contended that, Mr. Mohd. Sahid is a professional Chartered Accountant and in that capacity had been advising some of the business concerns of the assessee and this by itself is insufficient to conclude that, Mr. Mohd. Sahid was acting at the instance of the company. He pleaded that, Mr. Mohd. Sahid was reviving a defunct company and when an opportunity was seen by him, he took it in his lap and since he had known the assessee and his wife, were confident that, the money lent by his company is secured. He contended that, any business of this nature is always based on trust and prior knowledge of the person. He accordingly contended that, the suspicion of the revenue that JCPL is only a front is based on non-realisation of these facts. Shri Agarwal pleaded that, when JCPL has been assessed on the net of interest income earned by it and that too in a substantive capacity, it would be wrong on its part to suggest t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effort to eliminate JCPL from the scene by holding it to be a benami of the assessee, does no more than to project the true picture of the involvement of two companies, either of which companies, the assessee was not a shareholder at the point of time of grant of loan. He accordingly contended that section 2(22)(e) of the Act had been wrongly invoked. 10. Shri Agarwal submitted that, legitimate transactions that involve tax planning have been held to be valid, so long as they are within the framework of the law. He referred to the Supreme Court decision In Union of India v. Playworld Electronics (P.) Ltd. [1990] 184 ITR 308 and submitted that, the revenue is entitled to lift the existence of any veil to get to the bottom of the real transaction. He contended that, the ratio laid down in P.V. John's case is categorical to the point that, it must be established that, the entire transaction was at the behest of the appellant and on his behalf. He pleaded that, the transactions may appear suspicious, but, mere suspicion could not be the basis for concluding that, the transaction is a make belief affair. 11. Shri Agarwal submitted that, the Supreme Court in Smt. Tarulata Shyam v. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g provision. He submitted that, section 2(22)(e) of the Act as it stands, recognises only those as shareholders who are registered shareholders of the company and since, the appellant is not a registered shareholder, the said provision does not get attracted at all. 13. Shri Agarwal submitted that, section 2(6A)(e) of the Income-tax Act, 1922 is pari materia the same as in section 2(22)(e) of the Income-tax Act, 1961, with the only addition of the words 'beneficial shareholders'. He submitted that, quite a few decisions under the Income-tax Act, 1922 of the various courts had analysed the term 'shareholder' as was appearing in section 2(6A)(e) of the 1922 Act and the unanimous view had been that, it refers to only registered shareholder. He referred to the Calcutta High Court decision in CWT v. Smt. Sumitra Devi Jalan [1974] 96 ITR35 insupport of his above contention. He also referred to the Supreme Court decisions in CIT v. C.P. Sarathy Mudaliar [1972] 83 ITR 170 and Rameshwarlal Sanwarmal v. CIT [1980] 122 ITR 1, for the same proposition. 14. He contended that, the second limb of section 2(22)(e) is concerning a beneficial shareholder. He reiterated that, the section covers o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either a registered shareholder nor the beneficial owner of the shares. 15. Shri Agarwal submitted that, the revenue had held that, the assessee on becoming a director of MLL on 23-5-1988, had all the powers to get the registration effected in his name and its postponement is with a view to avoid tax. He contended that, Ramchandani and family had insisted on settlement of their dues in full before the shares could be transferred, which has not been established by the revenue as false. He pleaded that, revenue officials had questioned the seller, who had confirmed that, it was at their instance that, the shares were got registered in July 1988, soon after they were paid in full of the consideration for the shares. He contended that, the sellers not only did not allow the registration to be effected till they were paid in full, but also, did not permit the assessee being treated as the beneficial owner, thus retaining the rights of a shareholder together with the beneficial interest thereon. He referred to the Tribunal decision in ITO v. Smt. S. Parvathavardhini Ammal [1988] 24 ITD 243 (Coch.) and submitted that, in that case, the assessee had gifted certain shares to minors, but t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the precise reason that, the appellant had hacked up the plan of introducing JCPL, to make it appear as if the lending was to JCPL which did not hold any shares and then further give it to the appellant, who did not hold any shares of JCPL. She pleaded that, to top it all, the appellant postponed the transfer of the shares in his name, not realising that, the actual date of registration is inconsequential, because, all registration relates back to the date of the transaction. She referred to the Rajasthan High Court in CIT v. Smt. Suraj Bhai [1972] 84 ITR 774 and submitted that, it was clearly held that, the shares being movable property, the transaction of gift is complete, the moment the shares are handed over and the date on which it was registered in favour of the donee is irrelevant. She referred to the Supreme Court ruling in Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 and submitted that, the Supreme Court while upholding the Constitutional validity of the section 2(6A)(e) of the income-tax Act, 1922, had clearly observed that the intention is to curb the practice of moneys being lent to the shareholders with the intention to evade tax. She also referred to the Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Jalan's case contended that, the appellant having become the director on 23-5-1988, it was well within his powers to get the shares transferred in his name and therefore, mere postponement of registration to a date later than the date of loan should not be construed as loan being given to a person who is not a shareholder. She contended that, the seller remained powerless against the assessee on this aspect and the claim that, it was at the instance of the seller that, registration was effected only when full payment was made to him, indicates the intention to evade tax, which aspect should not be treated lightly. Shri A. K. Gupta, the learned senior departmental representative submitted by referring to the Shroud's Legal Dictionary that, the assessee was all along beneficially interested in the shares, right from the time, he had obtained the blank transfer forms duly discharged by the sellers. He pleaded that, the terms 'beneficial owner of shares', 'beneficially entitled', 'beneficially interested' all have been defined as benefits that would accrue to that person and none else. He contended that, the assessee had acquired these shares with the sole intention of retaining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partner and in which he has substantial interest (hereinafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits." 20. The section reads - any payment by a company by way of advance or loan to a shareholder, being a person who is a beneficial owner of shares... any payment by any such company on behalf, or for the individual benefit, of any such shareholder. It indicates that, the section is concerned only with those shareholders, who are entitled to the benefits under the shares in their own rights. This is obvious because, the section intends to cover those situations of profits of company being given to a shareholder for his individual benefit, either directly to the shareholder or indirectly, by making the payment on his behalf. The term 'beneficial owner of the shares' is used in continuation to the word 'shareholder', which makes it undoubtedly clear that, the section covers a shareholder, who has all the benefits under the shares accruing to him alone. Therefore, section 187(c) of the Companies Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered in the register of members, Mere physical holding of sharescrips does not give such a person the rights of a member and therefore, he cannot enforce any right as a member against the company, because, he has no locus standi. Such a person, who is interested in being conferred the rights of a shareholder, must necessarily ensure that, his name is entered in the register of members. Therefore, insofar as the Companies Act is concerned, a person whose name is not entered in the register of members, he shall not be recognised as a member or as a shareholder. In other words, a person who has mere physical possession of the shares of a company, does not make him a member or a shareholder of the company. The holder of such shares has the only right to get those shares registered in his name and nothing more. Shareholder is a part owner of the company along with several other shareholders and the person who purchases shares from such an owner, unless the purchase is recognised by the company in the shape of registration In the members register, by removing the name of the former owner and substituting the name of the new owner, the purchaser is not treated by the company as its own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, she was unaware of the funds having been borrowed from MLL. She further stated that, even before the loans given by JCPL to the assessee, he had substantial shareholdings by virtue of purchases made in the assessment year 1988-89 and not by virtue of purchases from her. She had enclosed a detailed reply drawn up by her counsel addressed to DCIT - Spl. Range II, Bombay, in connection with the proposed assessment treating the amounts received by her from MLL routed through JCPL and the assessee, as in the nature of advance to a substantial shareholder attracting the provisions of section 2(22)(e) of the Act. This written statement of Smt. Monika Ramchandani nowhere states that, she insisted on being paid in full before allowing the registration of the shares in favour of the assessee. The assessee, had become the director of the company on23-5-1988and it has been claimed that, from this date, he had all the required powers to get the transfer registered in his name and this should not be viewed lightly. The counter-claim put forth in this regard was that, the seller insisted on their dues being fully settled before getting the shares registered in his name. The counter-claim as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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