TaxTMI 
TaxTMI 
2019 (9) TMI 370
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....hat as individual he had voting power of 8.84% and as Karta /member of HUF his share is 25% of Income in HUF and has voting rights in the company M/s Sumit chemicals Pvt. Ltd. to that extent. As per explanation 3 to the section 2(22)(e) of the I.T. Act 1961, the member/Karta is having substantial interest in the concern K. M Agarwal HUF. The HUF is having 9.54% share in the company. That is each member is having 2.38% of voting right. Shri K M Agarwal has voting right of 8.84% in individual capacity and 2.38% as member of HUF. Thereby it is necessary to club the share holding of Shri K. M Agarwal both as an individual and as Karta Member of HUF. As that is above 10% the deemed dividend section is rightly applied by the AO. 4. The Ld. Commissioner of Income Tax (Appeals)-I, Kanpur has erred in law by deleting the addition made on account of deemed dividend when the loan/advance was given to the Director in his saving bank account in his individual capacity and moneys were siphoned from company to share holder to the tune of 10.47 crores. 5. The Ld. CIT(A) has relied heavily on distribution of income but has not considered the voting power requirement of se....
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....M/s Sumit chemicals Pvt. Ltd. to that extent; that as per Explanation 3 to section 2(22)(e) of the Act, the member/Karta is having substantial interest in the concern, K. M Agarwal HUF; that the HUF is having 9.54% share in the company, which means each member is having 2.38% of voting right, therefore, Shri K. M Agarwal was having voting right of 8.84% in individual capacity and 2.38% as member of the HUF; that thereby it is necessary to club the shareholding of Shri K. M Agarwal, both as an individual and as Karta/member of HUF; that the ld. CIT(A) has erred in law by deleting the addition made on account of deemed dividend when the loan/advance was given to the Director in his saving bank account in his individual capacity and moneys were siphoned from company to the shareholder to the tune of Rs. 10.47 crores; that the Ld. CIT(A) has relied heavily on the distribution of income, but has not considered the voting power requirement of section 2(22)(e) of the Act; and that the reliance placed by the assessee on the decision of the Hon'ble Supreme Court, order dated 4.01.2017 in C.P. Mudalir was not considered by the ld. CIT(A), whereas he has placed reliance on the orders prio....
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....e section says that the shareholder i.e. in this case assessee Sri K.M Agarwal should be the shareholder of not less than 10% of voting rights .The section does not bar to club the individual capacity of the shareholder with his capacity as 'Karta' in HUF. Section only states that the shareholder should have 10% voting rights in the company to be receiver of deemed dividend .Sri K.M Agarwal is a registered and beneficial shareholder of shares in M/s Sumit Chemicals Pvt. Ltd having more than 10% of voting rights. However, to get the version of assessee, a show cause dated 30/01/2015 was issued to the assessee along with notice u/s 142(1) of the I.T Act, 1961. 4.3 Vide reply dated 06/02/2015 assessee submitted the reply on above issue. Assessee has replied, "As regards to the applicability of provisions of sec 2(22)(e)of the I.T Act, it is submitted that the assessee is neither a director nor having shareholding /voting power holding more than 10% of total shares in this company. The assessee is holding 25911 equity shares in the income, representing 8.82% shares." Further assessee has submitted, "In Point No.4 of the show cause notice....
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....orming an HUF or the income of the HUF be clubbed with that of individual and taxed accordingly. By proposing to club the shareholding of HUF with that of individual, your honour is trying to do something which is not permissible under the law". 4.4 To ascertain the exact facts of the case, a copy of audit report alongwith annexures and ROC return in Form 20B were procured from website and Circle-6 assessment record of company for M/s Sumit Chemicals Pvt. Ltd. for the A.Y 2012-13. Also the sales tax detail of the company were procured from the Sales Tax Site. The following facts have emerged from perusal of the above documents- • M/s Sumit Chemicals Pvt. Ltd. was a closely held company in which the directors and relatives of directors were shareholders. The company had not allotted shares to any outside members. There were two HUFs K.M Agarwal (HUF) and Ram Kumar Agarwal (HUF) which were also in the list of shareholders. Again, the family members were only allottees of shares in both the HUFs and were registered and beneficial owner of the shares. As per the ROC return filed in Form 20B by M/s Sumit Chemicals Pvt. Ltd on 31/08/2012, the company had inducted an....
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....e assessee during the year. Portion of reply of assessee dated 20/01/2015 is reproduced for reference, "As regard to the applicability of provisions of section 2(22)(e) of the I.T Act, it is submitted that the assessee is neither the director in the company nor having shareholding/voting power holding more than 10% of total shares in the company SCPL. Wherein in the audit report of the assessee the auditor had himself stated him to be the director of the company. ......................................................................................... It was only after confrontation to the assessee of the return filed with ROC, the assessee had submitted to the correct facts. The assessee tried to put up a case where he was a passive shareholder during the relevant period. Wherein, all the key affairs of the company were managed by Sri Sumit Agarwal and Sri Jay Narain Yadav as directors of the company Regarding the issue of clubbing of shareholding, assessee had relied upon the case law: regarding 'clubbing of income', which had no relevance with the present facts of the case. The assessee's shareholding as individual and Karta of HUF needs to be ....
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....mpanies (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 distributed, the dividend income would become taxable in the hands of the shareholders; that instead of distributing accumulated profits as dividend, the companies distribute them as loans or advances to shareholders or to the concern in which such shareholders have substantial interest, or make any payment on behalf of, or for the individual benefit of, such shareholder; that in such an event, by the deeming provisions, such payment by the company is treated as dividend; that the intention behind the provisions of section 2(22) (e) of the Act is to tax dividend in the hands of the shareholders; and that the deeming provision, as it applies to the case of loans or advances by a company to a concern, in which its shareholder, has substantial interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loans or advances. 8. The ld. CIT(A) discussed the following case laws: ....
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.... dated 18.01.2016 was received on the same issue whether the share of Karta of HUF and Individual can be clubbed together for the purposes of section 2(22)(e) as under:- "However, I would like to rely on some additional facts and case laws in this regard. A book named "A Step Ahead" is published by the committee of departmental officers headed by CCIT(CCA), Gujrat in Gujrat region on controversial issues in assessment. The interpretation of section 2(22)(e) with regard to clubbing of shareholding rights was taken from there. Moreover, Delhi High Court in the case of National Travels Services (supra) elaborately analyzed this issue and concluded that in case it is accepted that firm not being a legal entity cannot become a shareholder of a company and in case loan has been advanced to a firm whose partners are shareholders, then it would frustrate the provisions of Section 2(22)(e), and will lead to absurd results. Therefore, loan received by a firm, whose partners are registered shareholders of the company which advanced the loan, would fall within the ambit of Section 2(22)(e). Likewise, as per company law HUF is represented by its Karta. The loan taken by Karta from comp....
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....n. However as the primary condition of 10% beneficial shareholding of Mr. K.M Aggarwal is not established the remaining amount/ part of the addition becomes an exercise in futility because nothing can be added under section 2(22)(e). Therefore no comments are offered on the same. As Shri K.M. Agarwal holds 8.82% shares in closely held private company M/s Sumit Chemicals Pvt. Ltd., both as registered and beneficial owner, he is not covered by the provisions of section 2(22)(e). Addition made is deleted on this ground as not sustainable. Result: Addition made is deleted on this ground as not sustainable. Appeal is allowed." 12. Having considered the rival contentions in the light of the material placed on record, we find no error whatsoever in the order under appeal. In 'CIT vs. National Travel Service' (supra), as noted by the ld. CIT(A), the concerned partnership firm consisted of three partners, namely, Mr. Naresh Goyal, Mr Surinder Goyal and M/s Jet Enterprises Private Limited. The three partners had profit sharing ratio of 35%, 15% and 50%, respectively. NTS was a shareholder of M/s. Jetair Private Limited (Jetair), holding about 4....
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....of the shares. It is dear there from that both the conditions have to be satisfied. This view has been followed by the Rajasthan High Court in the case of Harish Chand Golecha Vs. CIT, 132 LTR 30 while dealing with the present provision contained in the Income Tax Act, 1961. The expression - being a person as a beneficial owner of shares, qualifies the word "shareholder'. Thus to attract the provisions of Section 2(22)(e) of the Act, the person to whom the loan or advance is made should be a shareholder as well as beneficial owner. This brings us to the more important issue viz. whether the 'assessee firm' can be treated as a shareholder having purchased shares through its partners in the company which has paid the loans or is it necessary that a shareholder has to be a 'registered shareholder'. If the contention of the assessee is accepted, in no case a partnership firm can come within the mischief of Section 2(22)(e) of the Act because of the reason that shares would be purchased by the firm in the name of its partners as the firm is not having any separate entity of its own. With the name of the partner entering into the regist....
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.... offered on the same. As Shri K.M. Agarwal holds 8.82% shares in closely held private company M/s Sumit Chemicals Pvt. Ltd., both as registered and beneficial owner, He is not covered by the provisions of section 2(22)(e). Addition made Is deleted on this ground as not sustainable. Result: Addition made is deleted on this ground as not sustainable. Appeal is allowed." 15. No decision contrary to 'CIT vs. National Travel Service' (supra) has been cited before us. There is also no contra decision to the following decisions, as relied upon by the assessee: (1) Order of ITAT Indore Bench in the case of Manish Karwa Vs. ACIT [2014] 45 Taxmann.com 351. (2) Order of Ahmedabad Bench of ITAT in the case of JCIT Vs. Kunal Organics (P) Limited [2007] 164 Taxman 169 (Ahmedabad). (3) Judgment of Hon'ble Delhi High Court in the case of CIT Vs. Ankitech (P) Limited [2011] 11 Taxraann.com 100 (Delhi). (4) Judgment of the Hon'ble Supreme Court of India in the case of CIT Delhi Vs. Madhur Housing and development Company approving the judgment of the Hon'ble Delhi High Court in the case of Ankitech Private Limited ....
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.... for purchase net of excise & VAT as the aforesaid taxes are available to the customer as Cenvat/ Input Vat" against Excise duty payable/ output Vat payable. The reconciled account statements filed during before me both in books of SCPL and M/s Synthetic Silica Products & M/s Chhavi Microfine together with Tax Audit report of SCPL & assessee established that there are no difference in the books of the two accounts. It appears that there was no reason to add all the debits entries (sale or interbank transaction) in the account of SCPL as appearing in books of Synthetic Silica Products & Chhavi Microfine Products to arrive at total sales made by assessee to SCPL. If this is followed the aggregation of entries relating to sales appearing in the customer's ledger, as appearing in supplier's books, would exceed the purchase recorded by the customer in its purchase account. The AO was called by me to discuss the issue the on 10.10.2016 and subsequently remand report dated 18.01.2016 was received on the same issue The A.O. has stated in the remand report as under: "The ledgers submitted by the assessee on various dates and the ....
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....n perusal of the HUDFC Savings Bank account of the assessee and the details submitted by the assessee during the assessment proceedings, noted that assessee had invested Rs. 50 lakhs on 30/3/2012 out of balance in his Savings Bank account; and that in the computation of income filed by the assessee, the assessee stood shown to have reduced the total profit of Rs. 1,07,03,181.74 from both the proprietary concerns by the interest paid on borrowed funds of Rs. 65,22,404/-. The Assessing Officer asked the assessee, vide query letters dated 30/1/2015 and 11/2/2015, to explain the nature and allowability of this expenditure. In response to that, the assessee submitted that the amount of interest was paid on borrowed funds which were of unsecured nature; that the amount was used for business purpose and was in accordance with section 37 of the Act; and that the immediate source of this FDR was the amounts taken from family members, on which no interest was paid. The Assessing Officer did not accept the contentions of the assessee and disallowed the interest amount of Rs. 50 lakhs and added to the income of the assessee. 26. The ld. CIT(A) has discussed this issue at pages 22 to 25 of h....
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....ree loans, whereas he is incurring interest on the bank loans. We have to examine if business funds have been used for these investments. Here it is has to be established/ proved if the borrowings were utilized for non-business purposes, if yes then hence disallowance u/s 36(1)(iii) is to be made for utilization of borrowed funds for on business purposes. As is borne by several judicial pronouncements that it is not the job of the revenue to step into the shoes of the assesse and to decide how he should run his business. It is true and the present case also. It is also matter of commercial judgment as to how the assessee makes his investments and how he utilizes his funds. But when the assessee starts claiming interest expenses from his income for the funds which are not deployed in the business then it becomes the out of the revenue to investigate and made disallowances of expenses which are bogusly claimed as having incurred for the purposes of business. Assesse has stated: "May note that the appellant had taken unsecured loans in preceding years for the purpose of his business which were utilized in proprietary concerns M/s S....