Commissioner Of Income Taxchennai v. M/S.printwave Services P. Ltd

In the High Court of Judicature at Madras Dated: 10.11.2014 Coram The Honourable Mr.JUSTICE R.SUDHAKARandThe Honourable Mr.JUSTICE G.M.AKBAR ALI Tax Case (Appeal) No.747 of 2014 Commissioner of Income TaxChennai. .... Appellant Vs. M/s.Printwave Services P. Ltd.No.7, Thiru.Vi.Ka.Industrial Estate,Guindy, Chennai - 600 032..... Respondent APPEAL under Section 260A of the Income Tax Act, 1961 against theorder dated 14.5.2010 in I.T.A.No.1636/Mds/2009 on the file of theIncome Tax Appellate Tribunal, Madras 'C' Bench for the assessmentyear 2005-06 against the order of the commissioner of Income Tax[Appeals] V, 121, Mahatma Gandhi Road, Chennai made inITA.NO.173/2006-07 dated 24.07.2009 and against the order of theIncome Tax Officer , Company Circle V [2], Chennai made inPAN.No.AAACP1953C dated 6.11.2007 for the assessment year 2005-06. (Delivered by R.SUDHAKAR,J.) This Tax Case (Appeal) is filed by the Revenue as against theorder of the Income Tax Appellate Tribunal raising the followingsubstantial questions of law:“1. Whether under the facts and circumstances ofthe case, the Income Tax Appellate Tribunal was rightin holding that a sum of Rs.40 lakhs paid is notassessable in the hands of the assessee company as perprovisions of Section 2(22)(e) of the Income Tax Act,1961? 2. Whether on the facts and in the circumstancesof the case, the Tribunal was right in holding thatpara 10.3 of circular No.495 dated 22.9.1987 issued byCBDT is not applicable?" https://hcservices.ecourts.gov.in/hcservices/ 2. The assessment in this case relates to the assessment year2005-06. The respondent/assessee, Printwave Services P. Ltd.received a sum of Rs. 41,46,588/- from another private limitedcompany, namely, Front Line Printers P. Ltd., which is stated to besister concern of the assessee company. On the date on which theabove amount was received, the assessee paid a sum of Rs.42,96,677/-to one Shri.T.R.Jawahar, who is said to be the Director in both thecompanies and was having common interest in both the companies. Onverification of the details furnished by the assessee, the AssessingOfficer found that the said T.R.Jawahar was holding 10% of theshareholding in the assessee company, Printwave Services P. Limitedand 43.9475% of shareholding in the assesse's sister concern FrontLine Printers P. Ltd. In the books of accounts of the assesseecompany, the amount received from Front Line Printers P. Ltd. wasshown as trade advance. It also came to the notice of the AssessingOfficer that the amount so paid by the assessee to Mr.T.R.Jawahar wasutilised by him for repayment of housing loan. Taking note of thesefacts, the Assessing Officer held as follows:“Hence, the use of nomencleature for the receipt ofadvance from Front Line Printers as 'Trade Advance' or'Printing Advance cum General Advance' is to divert theattention of the Assessing Officer and nothing but theloan received from the company. Therefore, the provisionu/s.2(22)(e) is attracted in this case.On perusal of the Balance Sheet of M/s.Front Line, itis found that the General Reserve as on 31.3.2005 isRs.1,10,00,000/-. Accordingly, the amount of Rs.40 lakhsis added u/s.2(22)(c) of the Income Tax Act, 1961.” 3. Aggrieved by the order of the Assessing Officer, the assesseepreferred an appeal before the Commissioner of Income Tax (Appeals),who allowed the appeal holding as follows:“ 2. On a perusal of the details filed in the courseof the assessment proceedings, the Assessing Officer notedthat the assessee company have received a sum ofRs.41,56,588 from a sister concern Front Line PrintersPrivate Limited. On the same date of receipt, an amountof Rs.42,96,677 was paid by the assessee company to ShriT.R.Jawahar. The Assessing Officer also noted that ShriT.R.Jawahar owned 10% of the shares of the assesseecompany and also 43.95% of the shares of Front LinePrinters. Shri T.R.Jawahar was also a director in boththese companies. Even though the amount received by theassessee company from Front Line Printers was shown astrade advance, the same had effectively been utilized byShri T.R.Jawahar towards repayment of housing loan. Onthese facts, the Assessing Officer brought to tax anamount of Rs. 40 lakhs as deemed dividend received by theassessee company in terms of the provisions of Section 2(22)(e) of the Income-tax Act, 2961. 3. The deeming provisions contained in Section 2(22)(e) come into operation in the case of any payment by wayof advance or loan to a share holder or to any concern inhttps://hcservices.ecourts.gov.in/hcservices/ which such share holder has a substantial interest.Deemed receipt of dividend can only be in the hands of asubstantial share holder. It is a fact that the assesseecompany itself is not a share holder in the company FrontLine Printers. Accordingly, no dividend, normal ordeemed, could have been received by the assessee companyfrom Front Line Printers as long as the assessee companywas not a share holder in that concern. The substantialshare holder in the concern Front Line Printers was ShriT.R.Jawahar and deemed dividend, if any, would beassessable in his hands alone and not in the hands of theassessee company. The assessment of deemed dividend inthe hands of the assessee company was accordingly notcorrect and the appeal filed on this ground bythe assesseecompany is hereby allowed.” 4. The Income Tax Appellate Tribunal, before which the Revenuepursued the matter, came to the conclusion that in order to satisfythe requirement of Section 2(22)(e) of the Income Tax Act, theassessee should be the beneficial owner of the shares besides being aregistered shareholder. Only if these two ingredients are satisfied,the question of assessment to tax as deemed dividend would arise. Inthis regard, the Tribunal relied upon the earlier decision of theTribunal reported in 118 ITD 1 (ACIT V. Bhoumik Colour (P) Ltd.) TheTribunal, on a plain reading of Section 2(22)(e) of the Income TaxAct, came to the conclusion that the assessee not being a registeredor beneficial owner of the shareholdings, is not liable to be taxedand hence the Tribunal placing reliance on the Explanatory Notes toFinance Act stating that it cannot override the provisions of the Actrejected the appeal filed by the Department. 5. Aggrieved by the order of the Income Tax Appellate Tribunal,the Revenue has filed the present appeal. 6. We have heard Mr.T.R.Senthilkumar, learned Standing Counselappearing for the Revenue at length and perused the materials placedbefore this Court. 7. Before going into the merits of the case, it is relevant toextract the provision relating to dividend. Section 2(22)(e) of theIncome Tax Act defines dividend, which reads as follows:"2(22)dividend includes____....... 5. Aggrieved by the order of the Income Tax Appellate Tribunal,the Revenue has filed the present appeal. 6. We have heard Mr.T.R.Senthilkumar, learned Standing Counselappearing for the Revenue at length and perused the materials placedbefore this Court. 7. Before going into the merits of the case, it is relevant toextract the provision relating to dividend. Section 2(22)(e) of theIncome Tax Act defines dividend, which reads as follows:"2(22)dividend includes____....... (e) any payment by a company, not being a company in whichthe public are substantially interested, of any sum(whether as representing a part of the assets of thecompany or otherwise) made after the 31[st] day of May, 1987,by way of advance or loan to a shareholder, being a personwho is the beneficial owner of shares (not being sharesentitled to a fixed rate of dividend whether with orwithout a right to participate in profits) holding not lessthan ten per cent of the voting power, or to any concern inwhich such shareholder is a member or a partner and inhttps://hcservices.ecourts.gov.in/hcservices/ which he has a substantial interest (hereafter in thisclause referred to as the said concern) or any payment byany such company on behalf, or for the individual benefit,of any such shareholder, to the extent to which the companyin either case possesses accumulated profits;........” 8. From a reading of the above provision, it is clear thatSection 2(22)(e) defines dividend, which is a payment by way ofadvance or loan to a shareholder, being a person who is thebeneficial owner of shares holding not less than ten per cent of thevoting power, or to any concern in which such shareholder is a memberor a partner and in which he has a substantial interest. In thepresent case, the assesee is not the beneficial or registered ownerof the shareholdings in the company. 9. In the light of the above-said provision, the findings of theCommissioner of Income Tax (Appeals) as well as the Tribunal that theassessee, not being a registered or beneficial shareholder, is notliable to pay tax, are correct. We find no reason to interfere withthe order of the Tribunal. 10. Accordingly, finding no merits, this Tax Case (Appeal) standsdismissed. No costs. Sd/-Asst. Registrar /true copy/ sl Sub Asst. Registrar. To 1. The Income Tax Appellate Tribunal, Madras 'C' Bench, Chennai. 2. The Commissioner of Income Tax (Appeals) -V, Chennai. 3. The Income Tax Officer (OSD), Company Circle V(2), Chennai. +1cc to Mr.T.R.Senthilkumar,Advocate SR.No.53229 scd[co]gp/27.11 Tax Case (Appeal) No.747 of 2014