TaxTMI 
TaxTMI 
2020 (3) TMI 466
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....er section 2(22)(e) of the Act 1. erred in confirming the addition made by AO in respect of preference share application money received from Banneret Trading Private Limited (''BTPL'') as deemed dividend under section 2(22)(e) of the Act. 2. erred in holding that the preference share application money received from BTPL is similar to an unsecured loan; 3. erred in holding that the preference share application money provided by BTPL to the appellant is in the nature of any payment by BTPL on behalf of or for the individual benefit of shareholder i.e. Carol Info Services Limited ('CISL') and therefore covered by third limb to section 2(22)(e) of the Act without appreciating that Appellant is not the shareholder of BTPL; 4. failed to appreciate that the Appellant does not hold any shares of Merind Limited or vice versa nor Merind Limited holds any shares of BTPL or vice versa and accordingly, section 2(22)(e) does not trigger in the hands of the Appellant since it is not the shareholder; 5. failed to appreciate that in the absence of accumulated profits with BTPL, preference share application money received from BTPL can't be ta....
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....and statutory notices were duly issued and served upon the assessee. During the course of assessment proceedings, the AO observed that assessee has received preference share application of Rs. 90.00 crores. Accordingly, the AO called upon the assessee to furnish the details of share application money along with the necessary documents/evidences. In response to the notice, the assessee submitted the board resolution and financial statements of the entity from whom the assessee has received preference share application money. The AO observed from the financial statements of M/S BTPL that during A.Y. 2013-14 the said company sustained loss of Rs. 29,529/-. The AO further observed from the balance sheet that the said entity M/s. BTPL has Rs. 1,00,000/- as share capital,Rs. 77,193/- as negative reserve and surpluses, long term borrowings Rs. 736,28,23,727/- and current liabilities of Rs. 19,28,090/-. The assessee has made long term advances and loans of Rs. 755,28,12,730/- and is having cash balance of Rs. 61,904/-. The AO observed that M/S BTPL has no net-worth and it has borrowed huge loans during the year out of which it has made advances. The AO, in order to verify the genuine....
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....e letter dated 28.03.2016. The AO after considering the submissions of the assessee came to conclusion that M/s. BTPL is just a paper company having no creditworthiness and the transactions of investment in preference share of assessee company is not genuine. The AO also noted that the all these companies including assessee belonged to M/s. Wockhardt group. The AO concluded that since M/s. CISPL has given loans of Rs. 71.00 crores to M/s. BTPL who has further given the money as share application money to the assessee and thus virtual lending by M/s. CISPL to the assessee and therefore provisions of section 2(22)(e) of the Act has been clearly attracted. Similarly, The AO concluded that since M/s. Merind Ltd. has given share application money (Rs. 19 crores) to M/s. BTPL who has further given the money as share application money to the assessee and without getting into the share holding pattern of M/s. Merind Ltd. concluded that the back to back transaction tantamounts to virtual lending by M/s. Merind Ltd. to the assessee and therefore provisions of section 2(22)(e) of the Act has been clearly attracted. The AO noted that in order to avoid the tax liability M/s. CISPL formed M/s. B....
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....t the preference share application money has been received from BTPL which is not a registered shareholder of KHIPL. KHIPL is the registered shareholder of Carol Info Services Limited {'CISL'), which in turn holds 100% of the share capital in BTPL. The source of preference share application money is as under: iii) Loan received from CISL - INR 71 crores iv) Preference share application money received from Merind Ltd. - INR 19 crores" Prirna facie it is necessary to trace out the financial history of Carol arid the flow of funds from Carol to the Benneret and from Benneret to the assessee and others and from Merind to Benneret and from Benneret to Khorakiwala and look into reasons for such action on the part of Carol and Merind and then examine the applicability of section 2(22)(e} of the IT Act, 1961. First of all the ownership pattern of shares in the companies during the year was as follows: KHIL held 90.31 % of shares of Carol Info Services Limited Carol Info held 100% shares of Benneret Trading It appears from the perusal of the annual accounts of Carol as on 31/03/2013 that 'Carol had made profit after ....
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.... invested most of these 'Interest Free Loans of Rs. 736. 28 crores as 'Share Application Moneys in the three Group Companies, including Rs. 71 crores in Khorakiwala where it remained as outstanding as on the last date of the previous year, that is, 31 March 2013 similar to an unsecured loan.' It is highly probable that 'these shares were never issued till 31/03/2017 and these funds were shown as outstanding in share application money account of the respective parties, including Khorakiwala, since 'issuance of preference shares would have meant compliance with terms and conditions of the Companies Act 1956/2013 and SEBI relating to issuance of Preference Shares as is evident from the note number 8 to annual accounts of the assessee which reads as follows: 8. The Company has given share application money aggregating Rs. NIL (Rs. 1,073,400,500) to Darimour Holdings Private Limited and Loan, aggregating Rs. Nil (Rs. 742,058,593} to Tridos Laboratories Private Limited whose net worth as on March 31, 2013 is completely eroded- However considering future business plans of these Companies, the management is of the opinion that no provision is necessary in respe....
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....r less common in the annual accounts of all the group companies whose copies of annual accounts are filed during appellate proceedings. Another feature which is noteworthy here is that 'loans running into crores of rupees were given either as interest free loans/advances and/or as 'Share Application Moneys' and these loans and advances remained as such and interest was not charged and shares were not issued for long time and ultimately these share application moneys were returned to subscribers. It is also observed from the annual accounts that the assessee was not even authorized during the previous year relevant to AY 2013-14 to officially increase its authorized share capital during the year of Rs. 16,60,800/- and following note attached to the note number 6 of the annual accounts of Khorakiwala clearly reveal the facts of the case: 'The company has received share application money during the year, however, the company is in the process of increasing its authorised share capital and the quantum and terms and conditions of allotment shall be decided after increase of authorised share capital' It is also observed from the annual accounts of Be....
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....al loss of Rs. 9.23 crores. The financial accounts clearly show that company's own funds consisting of reserves of Rs. 253.25 crores were used for investing in associate companies as follows: Wockhardt Limited Rs. 59.45 crores ( Equity shares ) Coral Info Services Limited Rs. 180.83 crores (Equity shares } Wockhardt Limited Rs. 80.00 crores (Preference Shares) Total Rs. 320.28 crores This is only the final picture, assessee has been indulging in changing its modes of deploying its funds, from investments to loans and advances and from advances and loans to investments, including giving funds by way of share application moneys. Similar are the facts in the case of Merind Limited which is said to. have transferred Rs. 19 crores as share application moneys to the assessee through the medium of Benneret to assessee on the same date, that is, 28 July 2012. And these amounts were shown and classified as loans and advances' by Merind in its books of accounts even till the last day of the financial year, that is 31/03/2013 since assessee did not have the legal mandate to raise 'preference share capital' of either 'Rs. 71 crores ....
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.... the first part of the section 2(22)(e) of the IT Act 1961 which is squarely covered by the provisions of the section 2(22)(e) of the IT Act 1961 for the simple reason that ' payment of Rs. 90 crores made by Benneret to Khorakiwala - the assessee who holds 90.4% of shares of Carol Info which had given an interest free loan of Rs. 71 crores of Benneret, is nothing but a case of straight transfer of funds occurring on the same day, that is, 27/28 July 2012 from Carol to Benneret by loan, from Benneret to Khorakiwala as loan /advance /share application moneys and from Khorakiwala to Carol by way of investment in shares. Thus, interest free funds by way of loan/advance from Carol have gone back to Carol as share investments and thus the entire circle is completed. Thus this entire exercise is nothing but a device and a fagade created by the Khorakiwala Group Of Companies to circumvent the provisions of section 2(22)(e) of the IT Act 1961 not only in the case of this company but also in other group of companies, as is evident from the Board resolution of Benneret which was nothing but a conduit company for transfer of interest free funds by way of loans/advances running into crores ....
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.... its losses by either paying back its debts and hence reduce its expenses and/or invest interest free funds in revenue generating investments to generate income and absorb losses commercially and under the IT Act 1961 to reduce and avoid payment of income tax. Therefore, the entire facts of the case and other group companies clearly show that 'the entire restructuring exercise had only two main purposes, one to restructure the share holding in a way to retain control over the group companies and second to reduce and avoid payment of taxes under the specific provisions of the IT Act 1961'. Therefore, Supreme Court decision in the case McDonald & Co Limited v/s. CTO- 1985/22/Taxman/11 is squarely applicable to the facts of the case. In nutshell, contention raised by the assessee in the letter that 'the decisions quoted by the AO do not apply to the facts of their case, is rejected in facts and in law' and held that the provisions of section 2(22)(e) of the IT Act 1961 were applicable to the assessee's case and hence the action of the AO in this regard is upheld. Thus in nutshell, what has happened is that Benneret a wholly owned subsidiary of Car....
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....o- Total investment of Khorakiwala as on 31/3/2013 in Carol by way of shares-Rs. 180.83 crores) ....' is nothing but 'a deemed dividend under section 2(22)(e) of the IT Act, 1961 since funds of Rs. 90 crores of Benneret have flowed back by way of loan/advance/share application moneys to the shareholder, Carol Info through the medium of its holding company, Khorakiwala by way of investment of Rs. 180.83 crores in carol info services limited". This is purely based on facts of the case and even if the payment of Rs. 90 crores treated as loan/advance and/or share application moneys, the words any payment mentioned in third part of the clause of section 2(22)(e) of the IT Act 1961 will squarely fall within the ambit of section 2(22)(e) of the IT Act 1961 and hence the 'payment of Rs. 90 crores by Benneret to Khorakiwala during F.Y.2012-13 relevant to A.Y.2013-14 is nothing but a deemed dividend and chargeable to'tax. AO has dealt with only first part of the sub clause whereas the third sub clause which is very wide, squarely applies to the facts of the case. Therefore it is held that 'the provisions of section 2(22)(e) of the IT Act, 1961 were squarely applicable und....
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....itted that similar share application money was also paid to other entities in the group and same were duly disclosed in the notes to accounts in the annual audited financial statements of M/s. BTPL. The Ld. A.R. submitted that on 07.03.2016 M/s. BTPL replied to notice issued by the AO under section 133(6) of the Act and filed the board resolution for making investments in the preference shares of assessee company beside furnishing memorandum of article association. The Ld. A.R. submitted that vide letter dated 10.03.2016 the assessee filed copies of ITR, computation of income, annual accounts and tax audited report of M/s. CISPL. The Ld. A.R. submitted that the assessee has used the said money for repaying the entire loan of Rs. 194,57,88,998/- taken from M/s. CISPL in F.Y. 2008-09 and therefore the money received by the assessee in the form of preference share application money from M/s. BTPL can not be taxed under section 2(22)(e) of the Act. In defence of his arguments, the Ld. A.R. relied on the following decisions: 1. CIT v. Madhur Housing & Development Co. Civil Appeal No.3961 of 2013 2. CIT vs. Jignesh P Shah (2015) 372 ITR 392 (Bom.) (HC) 3. Pr. C....
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....ased on the audited financial statement as on 31.03.2013. The Ld. A.R. submitted that in absence of any accumulated profits in the hands of M/s. BTPL the preference share application money received from the M/s. BTPL can not be treated as dividend in the hands of the assessee section 2(22)(e) of the Act. 11. The Ld. A.R. stated that both the group companies M/s. CISPL and M/s. BTPL are in the business of giving loans and advances to the group companies. The Ld. A.R. without prejudice submitted that even if the amount paid by M/s. BTPL to the assessee is regarded as loan in the ordinary course of business, there should be no implication of provisions of section 2(22)(e) of the Act as M/s. CISPL and M/s. BTPL have advanced money in the ordinary course of business. The Ld. A.R. submitted that M/s. CISPL has advanced Rs. 749.00 crores as loans and advances to the related parties out of total assets of Rs. 911.00 crores as on 31.03.2013. Thus the advances given constitute 82% of the total assets of M/s. CISPL. The Ld. A.R. submitted that the corresponding amounts of the assets and loans and advances for the year ended 31.03.2012 were Rs. 664 crores and Rs. 507 crores respectively rep....
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....d that total amount paid as share application money was Rs. 755.00 crores out of which the amount pertaining to the assessee was only Rs. 90 crores. The Ld. A.R. submitted that M/s. BTPL has received total loans to the tune of Rs. 723.00 crores during the year out of which Rs. 71 crores was received from M/s. CISPL. Therefore, it can not be said that the said transaction was just to avoid deemed dividend under section 2(22)(e) of the Act. Countering the allegations by the lower authorities that M/s. BTPL was a sham company incorporated to avoid the tax , the Ld. A.R. submitted that M/s. BTPL was incorporated in the year 2008 and thus the allegation of the AO that M/s. BTPL is a sham company and was formed in order to carry out this transaction was wrong and against the facts on record. The Ld. A.R. submitted that during the year the assessee has repaid loan to the tune of Rs. 406.00 crores approximately and the money received from M/s. BTPL as preference share application money was only a small portion thereof i.e. Rs. 90.00 crores. The Ld. A.R. submitted that there is commercial exigencies and expediency for the said transaction and this transaction was executed by way of book ent....
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....sessee owns 90.3% of the equity shares in M/s. CISPL which holds 99% equity shares in M/s. BTPL meaning thereby that ultimately the assessee is beneficial owner of M/s. BTPL who has advanced money to the assessee in the guise of preference share application money. The Ld. D.R. submitted that out of Rs. 90.00 crores was invested by M/s. BTPL in the assessee, Rs. 71.00 crores was received from M/s. CISPL as loan and Rs. 19.00 crores was received from M/s. Merind Ltd. Thus whole transaction was a part of the planning done by the assessee to circumvent the provisions of section 2(22)(e) of the Act. Countering the arguments of the Ld. A.R. that M/s. BTPL has no accumulated profit, the Ld. D.R. submitted that admittedly M/s. BTPL has no accumulated profit but the company from which the funds were flowing i.e. M/s. CISPL has huge accumulated profit and therefore for the purpose of invoking section 2(22)(e) of the Act, the accumulated profit of the M/s. CISPL has to be seen and not of M/s. BTPL as the transaction of investment into the assessee is being looked at from the angle of funds invested by M/s. CISPL through M/s. BTPL in the assessee company. The Ld. D.R. also submitted that thoug....
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....anies and advanced the same intra group. The Ld. D.R. referred to the statement recorded under section 131 of the Act of Mr. A Shiva Subramanian, director of M/s. BTPL who submitted in reply to question No.14-18 that M/s. BTPL was not into any active business and was only used to transfer the funds from M/s. CISPL to other group companies. Therefore, in the present case, the facts are clearly distinguishable wherein the AO has made addition in the hands of the assessee who is shareholder of M/s. CISPL who has actually advanced the money through M/s. BTPL. In view of these facts, the Ld. D.R. submitted that the arguments of the assessee deserved to be rejected. The Ld. D.R. submitted that Ld. Counsel of the assessee has also relied on some case laws of various High Courts and Tribunals, however, they not applicable to the facts of the present case. The Ld. D.R. submitted that the decisions referred to by the Ld. A.R. in the case of HDFC Bank Ltd vs. ACIT (supra) pertains to section 40A(2) of the Act. In the case of Pr. CIT vs. Rajeev Chandrashekhar (supra) the shareholdings pattern was different whereas in the case of CIT vs. Pravin Bhimshi Chheda (supra) the nature of transaction i....
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....d the amount paid/invested in group company to the tune of Rs. 755.00 Crores including the assessee's company as preference share application money of Rs. 90.00 crores. M/s. BTPL has also replied to the notice under section 133(6) of the Act issued by the AO to verify the said share application money by submitting and furnishing the copy of board resolution authorizi1111ng the making of investments in the shares of assessee besides filing copy of memorandum and articles of association. During the year the assessee has repaid the entire loan of Rs. 194,57,88,998/- taken from M/s. CISPL in A.Y. 2008-09 and this Rs. 90 crore was also utilized in the repayment of loan as stated above. The AO treated the preference share application money received by the assessee of Rs. 90.00 crores as deemed dividend under section 2(22)(e) of the Act on the ground that the said money was in fact received from M/s. CISPL in which the assessee holds 90.31% equity shares through intermediary company M/s. BTPL in which M/s. CISPL holds 99% of the equity share capital. According to the AO the said amount received in the form of share application money is directly covered under the provisions of section 2(22....
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....round that assessee is beneficiary of dividend in Vectra Holdings Pvt. Ltd. which in turn is beneficiary of dividend from Jupiter Capital Pvt. Ltd. and he can be held beneficial or actual owner of the shares of Jupiter Capital Pvt. Ltd. The tribunal held that the assessee is not the shareholder in the lender company and therefore provisions of section 2(22)(e) are not applicable which was affirmed by the Hon'ble High Court. c)In the case of CIT vs. Pravin Bhimshi Chheda (supra) Hon'ble Bombay High Court has held that circuitous transfer of funds to shareholders was not deemed dividend if company got back its funds on the same day. It was held that provisions of section 2(22)(e) of the Act has to be construed strictly. d). Similarly, the Hon'ble Bombay High Court in the case of HDFC vs. ACIT (supra) has held that the beneficial ownership does not include indirect shareholdings though the judgment was rendered in the context of provisions of section 40A(2) of the Act. The question before the Hon'ble Bombay High Court was whether even the indirect shareholding is to be considered for the purpose of determining the substantial interest for the purpose of section 40A(2....
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.... M/s. CISPL was having sufficient accumulated profits has no meaning and is not a valid argument as the money is lent by M/s. BTPL and not by M/s. CISPL. Accordingly, the said arguments of the Department are also not accetable. We have also examined the balance sheet of M/s. CISPL and M/s. CISPL and observed that both these companies are in the business of making loans and advances to the group companies. Even if we presume that amount paid by M/s. BTPL to assessee is a loan, the provisions of section 2(22)(e) of the Act have no implication as M/s. CISPL and M/s. BTPL have advanced money in the ordinary course of business and is not a solitary transaction. This is clear from the fact that M/s. CISPL out of total assets of Rs. 911.00 crores as on 31.03.2013, Rs. 749 crores were represented by loans and advances to the related parties meaning thereby that 82% of the total assets of M/s. CISPL were used for advancing loans to the related parties. The corresponding figures of assets and loans and advances for the year ended 31.03.2012 were Rs. 664 crores and Rs. 507 crores respectively representing 76% of the total assets. Thus it is clear from the above that providing loans and adv....
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.... of receiving preference share application money from M/s. BTPL are sham transactions. In this case, we observe that money has been invested by M/s. BTPL in the assessee to the tune of Rs. 90.00 crores which is a part of the total money invested by M/S BPTL in other group company to the tune of Rs. 755.00 crores. Thus to say that this is a sham transaction is also wrong as the same is duly authorised by the decision of the board of directors as evidenced by the board's resolution and duly accounted in the books of accounts, stated in the annual accounts as well as notes to accounts of M/S BPTL. The source of money is clearly vouched and verified as M/s. BTPL has received Rs. 71.00 crore from M/s. CISPL and Rs. 19.00 crore from M/s. Merind Ltd. We also do not find any merit in the arguments of the Revenue that M/s. BTPL is a sham company as the said company specifically formed for the purpose of borrowing and advancing money from group companies and was incorporated in 2008 and not only for the purpose of this particular transaction. We also note that during the year, the assessee has repaid the loans to the tune of Rs. 406 crores approximately and thus Rs. 90.00 crores received ....
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....ers Pvt. Ltd. (supra) the Hon'ble Supreme Court has held that where the assessee was purchasing dividend bearing unit and selling them at a loss after receiving a dividend, the same can not be held as a sham transaction by observing and holding as under: "Even assuming that the transaction was pre-planned there is nothing to" impeach the genuineness of the transaction. With regard to the ruling in Mc Dowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC), it may be stated that in the later decision of this Court in Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 it has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of this Court in McDowell & Co. Ltd.'s case (supra)." In view of the above said facts and the ratio laid down by the various High Courts and Apex Court, we are not in agreement with the conclusion of the lower authorities that the transaction by M/s. BTPL to assessee was sham. Therefore, considering the facts and circumstances as discussed above in the light of ratio laid down in the ....
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.... 21. After hearing both the parties and perusing the material on record and as already noted by us, all the three companies M/S CISPL , M/S BTPL and the assessee are group companies of M/s. Wockhardt Ltd. and there is no doubt as to the identity of these companies, genuineness of the transaction and creditworthiness of the investor and also the source of source. The assessee has taken preference share application money of Rs. 90.00 crores from M/s. BTPL who in turn borrowed this money from M/s. CISPL Rs. 71.00 Crores as loan and from M/s. Merind Ltd Rs. 19.00 as share application money which is also a group company. Thus identity of these companies are very much established as the assessee has filed all the necessary evidences before the authorities below as regards the genuineness of the transactions. We are of the view that since the source of money is not in doubt and even the source of source has been explained thus the transactions in this case are genuine and there is no reason to treat the same as non genuine. As regards creditworthiness of the investor i.e. M/s. BTPL, we have no doubt as the money is advanced out of borrowed fund from M/s. CISPL and M/s. Merind Ltd. ....
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....pect of deletion of disallowance under section 14A read with rule 8D. 24. The facts in brief are that during the year the assessee has earned exempt income by way of dividend of Rs. 7,02,745/- and claimed the same as exempt. The AO noticed that assessee has made any suo-motto disallowance under section 14A read with rule 8D of Rs. 7,71,04,511/- and accordingly vide notice dated 11.01.2016 asked to explain the as to why disallowance should not be made as per section 14A read with rule 8D. In response, the assessee filed letter dated 22.01.2016 submitting the working of disallowance under section 14A read with rule 8D wherein the disallowance was worked out at Rs. 7,71,04,511/-. However, the AO rejected the working of the assessee and deworked the disallowance under section 14A at Rs. 8,09,27,595/-. The AO, therefore, made a net addition of Rs. 1,70,51,001/- after allowing the deduction of suo-moto disallowance. 25. In the appellate proceedings, the Ld. CIT(A) partly allowed the appeal of the assessee after taking into account the contentions of the assessee by deleting the disallowance of Rs. 1,70,51,001/- made by the AO. The ld. CIT(A) did not accept the plea of the assess....