TaxTMI 
TaxTMI 
2019 (9) TMI 370
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....ber 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 section 2(22)(e) of the I.T. Act, 1961 for the purpose as per Hon'ble Supreme Court....
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....rta 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 prior to this period. 4. The ld. counsel for the assessee, on the other hand, has placed reliance on the impugned order.....
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.... 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, your honour has asked to show cause as to why the shareholding of K M Agarwal HUF be not clubbed together with individual as Karta of HUF is representing before the com....
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....ble 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 outside member Sri Jay Narain Yadav as one of the directors. He was appointed on 30/11/2011. No shares were allotted to him though and had no voting power. The previous director was Sri K.M Agarwal who was director since 1988 and had resigned ....
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....e 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 clubbed as he was the director, registered shareholder of the shares and beneficial owner of the shares during the relevant previous year in the company. The section requires that the total shareholding of a particular shareholder needs to be seen in all the capacities in the company which should not be less than 10%. The jud....
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....buting 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: (1) ACIT vs. Bhaumik Colour (P) Ltd., 119 ITD 1 (Mum.) (SB). (2) CIT vs. Krupeshbhai N Patel, 34 Taxmann.com 245 (Gujrat). (3) CIT vs. Navibhai N Patel, 35 Taxmann.com 354 (Gujrat). (4) CIT vs. C. P. Sarathy Mudaliar, order dated 12/10/1971 of Hon'ble Apex Court. (5) CIT vs. C.P. Sarathy Mudaliar, 83 ITR 170 (SC). (6) Rameshwa....
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....2)(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 company would fall in ambit of deemed dividend. The Companies Act does not prohibit membership of Hindu Undivided Family. In case of HUF, the shares are registered in the name of 'A' as Karta of HUF. The assessee was asked to provide the register of members and shareholders maintained as per companies act. But, assessee had not provided any detail. The HUF consists of assessee and his family members and other shareholders alongwith the HUF are same family members. ....
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....is 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 48 percent shares. However, the shares were purchased in the names of two partners, namely Mr. Naresh Goyal and Mr. Surinder Goyal. Thus, the firm was the beneficial owner of 48 percent stake in Jetair, whereas the partners were the registered shareholders. NTS had taken a loan of INR 28.52 crores from Jetair. 13. The issue before the Hon'ble High Court in the case of 'CIT vs. National Travel Service' (supra), therefore, was whether the loan taken from M/s Jet Enterprises Pvt. Ltd. would be taxable as deemed dividend in the hands of MTS inspi....
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.... 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 register of members of the company as shareholder, the said partner shall be the shareholder in the records of the company but not the beneficial owner as beneficial owner is the partnership firm. This would mean that the loan or advance given by the company would never be treated as deemed dividend either in the hands of the partners or in the hands of partnership firm. In this way the very purpose for which this provision was enacted would get defeated. We are, therefore, of the opinion that for the purpose of Section 2(22)(e) of the Act, partnership firm is to be treated as the shareholder and it is not necessary that is has to be "registered s....
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.... 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 (supra) [2018] 401 ITR 152 (SC). 16. In view of the above, finding no error therein, the decision of the ld. CIT(A) on this issue is confirmed, rejecting ground nos. 1 to 5. 17. Ground No. 6 relates to the deletion of addition of Rs. 1,04,86,510/- on account of unaccounted sales. 18. The brief facts are that from the ledgers submitted by Shri K.M. Agarwal vide reply dated 13/11/2014, the Assessing Officer noted the sales transaction of the assessee with M/s Sumit Chemicals, for the year under consideration, as below: Sr No Prop. Concern Total Sales As per audit report of Sumit Chemicals P Ltd (A) Total Sales As per Ledger Submitted To JCIT Rg-2 vide reply 04/02/201 5 By Sumit Chemicals( C) Difference CA (Concealed Income) 1 Synthetic Silica Products 7889200 17843....
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....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 submission in this regard was made the part of the assessment order. From the perusal of the assessment order it can be seen that the assessee was unable to substantiate that why such huge difference had arisen. The claim of the assessee that the difference is due to Excise duty/VAT is totally incorrect and assessee should give some proof to reconcile the difference. The addition was made on real fact basis and not on hypothetical basis". In my opinion and understanding of the accounts, the above reconciliation explains the entire difference and in the light of the same. Addition made is not sustainable and the same is therefore dismissed. Result: Addition made is deleted and appeal allowed on this ground." 21. Before us, the ld. D.R. has submitted that the ld. CIT(A) has erred in law by deleting the addition of Rs. 1,04,86,510/- on account of unaccounted s....
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....n 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 his order. The relevant portion of the order is reproduced, as below: "This issue has to examined as per the provisions of section 36 (1) (iii) Let us examine the provisions of section 36(1) (iii) (iii) The phrase "for the purpose of business" - The expression "for the purpose of business" occurs In Section 36(1)(iii). For allowance of a claim for deduction of interest under this provision in Section 36(1)(iii) following three conditions are there (Supreme Court in Madhav Prasad Jatia Vs. CIT, (1979) 118 ITR 200 (SC) (i) The money, that is capital, must have been borrowed by the assessee (ii) It must have been borrowed for the purpose of business. (iii)The assessee must have paid interest on the borrowed amount i.e. he has shown the same as an item of expenditure. While explaining the meaning of this phrase the Hon'ble Supreme Court in the case of S. A. Builders Ltd. Vs. CIT(A), Chandig....