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2017 (6) TMI 293 - ITAT KOLKATA

2017 (6) TMI 293 - ITAT KOLKATA - TMI - Addition u/s 2(22)(e) - determination of shareholding of the assessee - Held that:- 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) and the shareholding of the Assessee’s subsidiary M/S.Hooghly Mills Projects Ltd., should not be considered an .....

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e 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 [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 Ku .....

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ds. 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 share capital of M/s. Mega Resources Ltd., that conferred 1.7% of the voting power in M/s. Mega Resources Ltd. The AO also noticed that another subsidiary company of the assessee by name M/s. Hooghly Mills Projects L .....

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Ltd., to the assessee and the same was liable to be treated as deemed dividend and chargeable to tax in the hands of the assessee. Section 2(22)( e ) of the Act, lays down as follows: Section 2(22) "dividend" includes- (a )to (d)****** (e )Any payment made 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) by way of advance or loan to a shareholder, being a person who .....

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ting a part of the assets of the company or otherwise) made after 31-5-1987, by way of advance or loan 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, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the .....

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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 powe .....

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st (hereafter in this clause referred to as the said concern). Third Limb: - (c) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder holding not less than 10% of the Voting power to the extent to which the company in either case possesses accumulated profits. A perusal of the order of the AO shows that the AO has applied the first limb of Sec.2(22)( e) in the present case. 5. Aggrieved by the order of the AO, the Assessee preferred appeal before C .....

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td., in the share capital of M/S.Mega Resources Ltd., is totally irrelevant for applying the provisions of Sec.2(22) ( e) of the Act. The CIT(A) agreed with the aforesaid submission of the Assessee and deleted the addition made by the AO. The following were the relevant observations of CIT(A) :- 8. I have perused the assessment order and the material on record. I have also considered the submissions of the assessee. I find that the facts in this appeal are not in dispute. The AO has noted in the .....

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ojects Ltd to make-up for the shortage in as much as the assessee company and its subsidiary company together held more than 10% of the voting power. The AO has given no reasons as to why he has included the share-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 vo .....

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f 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)(e) is that the assessee should be holding not less than 10% voting power. The provisio .....

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dividend has been enlarged to include even loans and advances; and so, the legal provision has to be given a strict interpretation. Secondly, the definition of dividend as given in section 2(22)(e) is an. inclusive definition and the AO was not competent to en1arge the same by importing things which do not form part of such legal fiction. In view of the above, the AO was not justified in including the shareholding of the subsidiary company also for the purposes of invoking section 2(22)(e). The .....

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y the order of CIT(A) the revenue has raised ground no.1 before the Tribunal. 7. The ld. DR submitted that the CIT(A) failed in not considering the combined voting power of the assessee and the assessee s subsidiary M/s. Hooghly Mills Projects Ltd in M/s. Mega Resources Ltd and in this regard placed reliance on the decision of the Hon ble Supreme Court in the case of Gopal & Sons (HUF) vs CIT 391 ITR 1(SC). We have perused the above decision. In the aforesaid decision the question that was c .....

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) 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 qu .....

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ent case. In this case the AO has applied the first limb. For applicability of the first limb what has to be considered is only the voting power held by the assessee in M/s. Mega Resources Ltd and controversy surrounding the second limb, which is the subject matter of the SLP filed before the Hon ble Supreme Court would be of no relevance to the present case. 9. In the case of ACIT Vs. Bhaumik Color Labs Pvt.Ltd., 118 ITD 1 (SB) (Mumbai), the Special Bench Mumbai had to deal with the following q .....

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erson who is a registered holder of shares. As already mentioned the condition under the 1922 Act and the 1961 Act regarding the payee being a shareholder remains the same and it is the condition that such shareholder should be beneficial owner of the shares and the percentage of voting power that such shareholder should hold has been prescribed as an additional condition under the 1961 Act. The word Shareholder alone existed in the definition of dividend in the 1922 Act. The expression Sharehol .....

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does not in any way alter the position that the shareholder has to be a registered shareholder. These provisions also do not substitute the aforesaid requirement to a requirement of merely holding a beneficial interest in the shares without being a registered holder of shares. The expression being is a present participle. A participle is a word which 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 adjec .....

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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 li .....

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cumstances of the case, the CIT(A) is not justified in law in directing the A.O. to compute the disallowance under Rule 8D(iii) by restricting to those investments that have yielded tax free dividend income during the year. 12. The issue raised in ground no.2 is with regard to disallowance of expenses incurred in earning exempt income u/s 14A of the Act. The issue is only with regard to disallowance of other expenses which is covered by Rule 8D(2)(iii) of the Rules. According to the Assessee onl .....

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ed in earning the dividend income. This was worked out @ 0.5% of the average investments. 13. On appeal by the assessee the CIT(A) directed the AO to consider only the investment which yielded dividend income for the purpose of working of the value of investment. In do so placed reliance on the decision of Hon ble TAT Kolkata in the case of REI Agro Ltd. In ITA No.1331/Kol/2011. The following were the relevant observations of CIT(A) :- 10. I have perused the assessment order and considered the s .....

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