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2016 (4) TMI 310 - KARNATAKA HIGH COURT

2016 (4) TMI 310 - KARNATAKA HIGH COURT - TMI - Addition on rental income of Kormangala Property - annual rateable value - Held that:- Tribunal has followed the decision of the High Court of Gujarat in case of Bipinbhai Vadilal Family Trust Vs. Commissoner of Income-Tax reported at (1994 (1) TMI 71 - GUJARAT High Court ) whereby it was held that the reasonable return at the rate of 8.5% on the investment can be considered as the annual rateable value.

Interest on the loan borrowed - H .....

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gatived the contention of the Revenue on the factual premise the at the assessee in the present case was not a shareholder in the lender Company. Further, the Tribunal has al so relied upon the decision of Rajasthan High Court in case of Commissioner of Income Tax Vs. Hotel Hilltop reported at (2008 (3) TMI 310 - RAJASTHAN HIGH COURT ). - ITA NO.305 OF 2015 - Dated:- 23-2-2016 - MR.JUSTICE JAYANT PATEL AND MRS.JUSTICE S SUJATHA. JJ. For The Appellant : Sri E.I.Sanmathi, Advocate For The Responde .....

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he facts and circumstances of the case, the Tribunal was justified in deleting the addition made by assessing authority in respect of rental income of Kormangala Property No.408 without appreciating the fact that the assessing officer had estimated the fair rent after causing enquiries as to the prevailing rent that similar property would fetch in the posh locality at Koramangala? 2. Whether on the facts and circumstances of the case, the Tribunal was justified in allowing interest on the loan b .....

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ion are not satisfied without considering the fact that the assessee owns 95% of the shares in M/s.Vectra Holding Pvt. Ltd., which in turn owns 99% shares of M/s.Jupiter Capital Pvt. Ltd., and thus becomes the beneficial owner of M/s.Jupiter Capital Pvt. Ltd.,? 4. We have heard Mr.E.I.Sanmathi, learned Counsel appearing for the appellants-Revenue and Mr.Parthasarathi, learned Counsel for the respondent-assessee. 5. On the first question, the Tribunal at para-9 has observed thus: 9. We have consi .....

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he actual rent received by the assessee would be much greater than the ALV determined by the BBMP. The CIT(A), has however determined the ALV u/s. 22/23 of the Act on the basis of Hon'ble Gujarat High Court referred to in the grounds of appeal by the Revenue. The course adopted by the CIT(A) is favourable to the Revenue, but the assessee has not chosen to challenge the same. In the light of law as declared by the Hon'ble High Court of Karnataka and in view of the fact that the CIT(A) has .....

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e High Court of Gujarat in case of Bipinbhai Vadilal Family Trust Vs. Commissoner of Income-Tax reported at (1994) 208 ITR 1005 Guj , whereby it was held that the reasonable return at the rate of 8.5% on the investment can be considered as the annual rateable value. 7. Under these circumstances, we do not find that question No.1 raised by the Revenue can be consider ed as substantial question of law which may arise for consideration in the present appeal. 8. On question No.2, the Tribunal at par .....

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of repayment of the loan taken from M/s.Tayana Consult Pvt. Ltd., w as considered by CIT (Appeals) and at paragraph-4.4 of the said order, it has been recorded as under: 4.4 I have considered the appellant s submissions and the reasons given by the AO in the assessment order. As mention in preceding para that property bearing No.407, 408 and 409 acquired during the financial year 2002-03 and total investment made thereon of ₹ 5,42,36,338/-. Initially loan was borrowed from ING Vysya Bank .....

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from M/s Tayana Consult Pvt. Ltd. of ₹ 5,61,81,550/- on 29/06/2004. Thus if at all interest to be charged on ₹ 3,48,62,400/- not on ₹ 5,19,00,000/-, since site No.445 was not subjected to lease agreement. Thus the total interest would comes at ₹ 20,91,744/- and six months interest would be ₹ 10,45,872/-. The Assessing Officer is therefore directed to consider interest of ₹ 10,45,872/- while computing income under the head Income from House property. Thus the a .....

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ing property is already confirmed by the Tribunal and the scrutiny of finding of fact is outside the scope of judicial scrutiny in t he present appeal. 12. On question No.3, the Tribunal has observed at paragraphs-21 to 28 which read as under: 21. We have heard the rival submissions. The provisions of Sec.2(22)(e) of the Act, reads as follows: (e) Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the asse .....

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ny 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. 22. 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 .....

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above provisions shows that there are three limbs to Sec.2(22)(e) which are as follows:- Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31-5-1987 , by way of advance or loan 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 .....

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oncerned with the second limb of Sec.2(22)(e) of the Act, viz., to any concern in which such shareholder is a member or a partner and in which he has a substantial interest . The following conditions are required to be satisfied for application of the above category of payment to be regarded as Dividend. They are:- (a) There must be a payment to a concern by a company. (b) A person must be Shareholder of the company being a registered holder and beneficial owner of shares (not being shares entit .....

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cern holding substantial interest in the concern viz., when the concern is not a company, he must at any time during the previous year, be beneficially entitled to not less than twenty percent of the income of such concern; and where the concern is a company he must be the 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 percent of the voting power (d) If the above conditions are satisf .....

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nds of a person other than a shareholder. The Special Bench on the above issue has observed as follows:- 30. At the outset it has to be mentioned that provisions of Sec.2(22)(e) which brought in a new category of payment which was to be considered as dividend as introduced by the Finance Act 1987 w.e.f.1-4-88 viz., payment by a company to any concern in which such shareholder is a member or a partner and in which he has a substantial interest do not say as to in whose hands the dividend has to b .....

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nce of ₹ 10 lacs from a company M/S.Hilltop palace Hotels (P) Ltd. The shareholding pattern of M/S.Hillltop Palace Hotels (P) Ltd., was as follows: 1. Shri Roop Kumar Khurana : 23.33% 2. Smt. Saroj Khurana : 4.67% 3. Vikas Khurana : 22% 4. Deshbandhu Khurana: 25% 5. Shri. Rajiv Khurana : 25% The constitution of the firm Hotel Hill Top was as follows: 1. Shri Roop Kumar Khurana: 45% 2. Shri. Deshbandhu Khurana: 55% The AO assessed the sum of ₹ 10 lacs as deemed dividend u/s.2(22)(e) o .....

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irm was not the shareholder of the company the assessment as deemed dividend in the hands of the firm was not correct. The order of the CIT(A) was confirmed by the Tribunal. On Revenue s appeal before the Hon ble High Court, the following question of law was framed for consideration:- Whether on the facts and in the circumstances of the case and in law the learned Tribunal was justified in upholding the order of learned CIT(A) deleting the addition of ₹ 10 lacs as deemed dividend under Sec .....

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of any such shareholder, obviously, the provision is intended to attract the liability of tax on the person, on whose behalf, or for whose individual benefit, the amount is pad by the company, whether to the shareholder, or to the concerned firm. In which event, it would fall within the expression deemed dividend . Obviously, income from dividend, is taxable as income from the other sources under section 56, and in the very nature of things the income has to be of the person earning the income. .....

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er, the amount is paid by the company to the concern. Thus, the significant requirement of section 2(22)(e) is not shown to exist. The liability of tax, as deemed divided, could be attracted in the hands of the individuals, being the shareholders, and not in the hands of the firm. 32. The aforesaid decision of the Hon ble Rajasthan High Court which is the only decision of High Court, should be sufficient to answer question No.2 which has been referred to the Special Bench by holding that deemed .....

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der or the concern(non- shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of Sec.2(22)(e) of the Act. 35. The intention behind enacting provisions of section 2(22)(e) are that closely held companies (i.e. companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distrib .....

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) is to tax dividend in the hands of shareholder. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which it s shareholder has substantial interest, is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern. 36. The basis .....

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on which these provisions have been made. It is therefore proper to construe those provisions as contemplating a charge to tax in the hands of the shareholder and not in the hands of a non-shareholder viz., concern. A loan or advance received by a concern is not in the nature of income. In other words there is a deemed accrual of income even u/s.5(1)(b) in the hands of the shareholder only and not in the hands of the payee viz., non-shareholder (Concern). Sec.5(1)(a) contemplates that the receip .....

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The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word Dividend is extended to loans and advances to a shareholder or to a concern in which a shareholder is substantially interested deeming them as Dividend in the hands of a shareholder the ordinary and natural meaning of the word Dividend is altered. To this extent the definition of the term Dividend can be said to operate .....

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