TaxTMI 
TaxTMI 
2020 (3) TMI 466
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.... 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 taxed as deemed dividend in the hands of the Appellant; 6. failed to appreciate that granting ....
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....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 genuineness of the transactions, issued summon under section 131 of the Act to the Pr. Officer of M/s. BTPL to verify the fact that how a company which was not having any business....
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....he 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. BTPL then transferred the money as share application money to the assessee. The AO noted that the M/s. CISPL instead of directly lending to the assessee lent the money through....
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....9;), 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 tax of RSJ73.46 crores for the ear ended 31/03/2013 on account of sale of its main business and had share capital of Rs. 35.43 crores and reserves and surplus of Rs. 790.57 crores as on 31/03/2013. Carol also advanced Interest Free Loans totallin....
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....rch 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 respect of these amounts" It is also worth mentioning here that even though 'Carol had long term borrowings of Rs. 26.77 crores as on 31/03/2CU3 on which interest by way of finance costs was payable, Carol chose to not repay The outstanding long Term borrowings totall....
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....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 Benneret and Merind for the year ended 31 March 2013 that the amounts of Rs. 71 Crores and Rs. 19 Crores were classified as 'Loans And Advances' by Benneret and Merind as on 31 March 2013 in their books of accounts. Even the assessee, that is, Khorakiwala had shown the total amount of Rs. 9....
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.... 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 from Benneret and Rs. 19 crores from Merind.' Thus the amount of Rs. 19 crores received from Merind through Benneret was also nothing but an ^unsecured interest free loan and advance'. M/s. Benneret was merely a conduit for transferring funds received from Merind to pass it on immediately to the assessee as 'interest free loan and....
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.... 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 of rupees to other group companies which needed funds to reduce losses. Assessee has primarily objected to the invocation of this clause on the ground that the 'funds have not been given to the share holder and primarily these payments were towards share application moneys and hence do not fall within the category of loans/advances as mandated by the p....
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....ring 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 Carol gave a loan/advance of Rs. 90 crores under the disguise of share application moneys to the assessee, Khorakiwala, who was holding 90.41 % shares of Carol and in which Kroakiwala had invested an amount of Rs. 180.83 crores as on 31 March 2013. There are three sub clauses of section 2(22)(e) of the IT Act 1961 and the last and third sub clause reads as follows: 2(22)(e): Any pay....
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....s 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 under the third part of the section 2(22)(e) of the IT Act, 1961 and hence action of the AO in treating the payment of Rs. 90 crores by Benneret to the assessee as 'deemed dividend' under the provisions of section 2(22)(e) of the IT Act, 1961 is upheld in facts of the case and in law since 'these provisions are squarely applicable. In nutshell, AO's action to treat the payment of Rs. 90 crores by Benneret to its as 'deeme....
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....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. CIT vs. Rajeev Chandrashekhar (2017) 397 ITR 263 (Kar.) (HC) 4. CIT vs. Pravin Bhimshi Chheda (2015) 228 Taxman 340 (Bom)(HC)(MAG) 7. The ld counsel of the assessee also relied on the decision of jurisdictional High Court in the case of HDFC Bank Ltd Vs ACIT (2019)410 ITR 247 (Bom) to prove his point that it is incorrect to regard a parent company/shareholder as beneficial owner of the assets held by the subsidiary company since the wholly owned subsidiary is a....
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....d 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 representing 77% of the total assets. The Ld. A.R., therefore, submitted that providing loan and advances to the group company is one of the business activities of M/s. CISPL and therefore lending of money is a substantial part of the business of M/s. CISPL. The Ld. A.R. while drawing our attention to clause (ii) of section 2(22)(e) of the Act submitted that it excludes from the scope of deemed dividend any advance or loan made to a shareholder or the said concerns by a company in the ordinary cour....
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....porated 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 entries only but actual money flowed from one party to another and the said transaction does not involve any infringement of law. The Ld. A.R. argued that the transactions which are carried out within the framework of law can not be termed as sham transactions just because there is a lower outflow of taxes. The Ld. A.R. placed reliance on the decision of UOI vs. Azadi Bachao Andolan & Anr. (2003) 263 ITR 706 (SC) and the Ld. A.R. also referred to Vodafone International Holdings vs. UOI (2012) 341 ITR 1 SC wherein the Hon'ble Suprem....
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.... 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 though the M/s. BTPL has raised huge amount of loans and advanced the same to the other group companies but the fact remains that the said company has no credibility, no net worth and no profits and the whole game plan was to circumvent the tax laws and therefore the addition of Rs. 90 crores needs to be sustained. The Ld. D.R. also submitted that the transaction entered into by the assessee with M/s. BTPL by way of accepting the preference share application money are sham transactions. The Ld. D.R. while distinguishing the decision of the Hon'ble Supreme Court in the case of CI....
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...., 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 is distinguishable and therefore not applicable to the present case. The Ld. D.R. further argued that the other contentions raised by the assessee qua the share application money received from M/s. BTPL that the said company not having any accumulated profit and that funds advanced in the ordinary course of business are accordingly liable to be rejected, in view of the aforesaid facts that the whole transaction was planned to circumvent the provisions of section 2(22)(e) of the Act. The Ld. D.R. while rebutting the Ld. Counsel's arguments submitted that this was a case of circu....
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....SPL 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)(e) of the Act as the money came from M/s. CISPL to M/s. BTPL and then to the assessee. The Ld. CIT(A) also upheld the order of AO on this issue by holding that the money in fact belonged to the entity in which the assessee is registered as well as beneficial shareholder to the tune of 90.31% and thus the advancing/investing money through M/s. BTPL is only an arrangement entered into by the assessee to circumvent the provisions of section 2(22)(e) of the Act. Undisputedly and factually, the assessee is not a registered shareholder of M/s. BTPL and therefore the condition as envisa....
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....ny 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)(b) of the Act. 15. We also find merit in the alternative arguments of the assessee's counsel that preference share application money is not in the nature of loans and advances. The case of the assessee is squarely covered by the decisions of the various High Courts. a) In the case of CIT vs. Vikas Oberoi (supra) the Hon'ble Bombay High Court has held that share application money received was not loans or advances for the purposes of invoking section 2(22)(e) of the Act. In the said decision, the Hon'ble Bombay High Court has upheld the ratio laid down by the Bombay Tribunal in the case of ITO vs. Direct ....
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....s 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 advances to group companies is one of the business activities of M/s. CISPL. We note that lending is a substantial part of business activity of M/s. CISPL which is specifically excluded from the scope of deemed dividend under clause (ii) to section 2(22)(e) of the Act . Therefore, even if the money/loan is presumed to be advanced advanced by M/s. CISPL to the assessee and not as share application money by M/s. BTPL even then the said amount can not be added in the hands of the assessee as deemed dividend under section 2(22)(e) of the Act on the ground that lending of money being a substantial part of business activity of the M/s. CI....
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....d 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 from M/s. BTPL is a small portion of funds utilised by the assessee to repay the loans and we find commercial expediency and commercial consideration in entering into various transactions. Moreover, the transactions by the group companies are not book entries but followed by actual transfer of funds involving no infringement of law. In our opinion, the transaction of the assessee is carried out within the framework of law and therefore can not be said to be sham transaction because there is a lower outflow of taxes. The case of the assessee is supported by the decision of UOI vs. Ajadi Bacho Andolan & Ors.(supra) wherein the department ha....
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....orners 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 various decisions as discussed hereinabove, we are inclined to hold that the provisions of section 2(22)(e) of the Act are not applicable in the present case and accordingly, we set aside the order of Ld. CIT(A) and direct the AO to delete the addition made under section 2(22)(e) of the Act. The ground no. 1 is allowed. 18. The second ground raised by the assessee is against the order of Ld. CIT(A) not adjudicating the ground that the preference share application money received by the assessee as is treated by the AO unexplained cash credit under section 68 of the Act without prejudice by failing to appreciate that the assessee has duly discharged its oblig....
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....hed 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. Therefore, in our opinion, all these three ingredients of section 68 are fully satisfied. Moreover, the money has transferred through banking channel and thus all the evidences are on record. The case of the assessee is also supported by the decision of the Apex Court in the case of CIT vs. Lovely Exports Pvt. Ltd. 216 CTR 195(SC) wherein the Hon'ble Court observed that once the assessee has given names and identity of the shareholders, the onus upon it gets discharged and no addition can be made in the hands of the assessee and the onus shifts to the department and if the department thought it to be appropriate, the Act permitted the tax department to proceed against such sha....