Income Tax Appeal v. M/S Hotel Hilltop

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR -------------------------------------------------------- INCOME TAX APPEAL No. 25 of 2005 V/S M/S HOTEL HILLTOP Mr. KK BISSA, for the appellant / petitioner Mr. ANJAY KOTHARI, for the respondent Date of Order : 17.3.2008 HON'BLE SHRI N P GUPTA,J. HON'BLE SHRI DEO NARAYAN THANVI,J. ----- This appeal by the revenue, against the judgmentof the Tribunal dated 16.9.2004, was admitted vide orderdated 29.3.2005, by framing following substantial questionsof law: “1.Whether on the facts and in the circumstancesof the case and in law, the learned Tribunal wasjustified in upholding the order of learned CIT(A)deleting the addition of Rs.10 lakhs as deemeddividend u/s 2(22)(e) of the I.T. Act?2.Whether the assessee firm whose partnersholds 100% share in M/s. Hilltop Palace Hotels (P)Ltd. had received the payment of Rs.10 lacs by wayof security and not as an advance is perverse?” The necessary facts are, that a return was filedby the assessee (firm) M/s. Hotel Hilltop, 5, Ambavgarh,Udaipur, declaring income of Rs.72,000/- on 3.1.92. The case was taken under scrutiny, and notices were issued. Itappeared that the assessee had shown liability ofRs.12,46,058/- under the head “other liabilities”, out ofwhich, a liability to the extent of Rs.10,87,747/-pertained to M/s. Hilltop Palace (P) Ltd. It alsotranspired to the Assessing Officer, that this liabilityconsist of Rs.10 lacs, received as an advance against thesecurity from the company, to the firm, under agreement tohand over the management of the firm hotel, to the company,and balance amount of Rs.87,747/- are of trade credits. Theassessee, vide order-sheet dated 13.8.93, was asked toexplain why the security of Rs.10 lacs be not treated asdividend, under Section 2(22)(e) of the Income Tax Act, andadded to the income of the firm. It is not in dispute, thatthe amount of Rs.10 lacs proceeded from the company to thefirm. It is also not in dispute, that the shareholdingpattern of the company is as under:- Likewise, it is also not in dispute, that at therelevant time constitution of the firm was as under:- The assessing Officer, in these circumstances,found the amount to be deemed dividend, under Section 2(22)(e), and assessed it in the hands of the firm. This orderwas challenged in appeal, and the learned Commissionerfound, that since the firm is not a shareholder of thecompany, the amount of Rs.10 lacs cannot be assessed to taxunder Section 2(22)(e), and thus, it was deleted. Against this order of the CIT, the Revenue filedappeal before the learned Tribunal, and the Tribunal found,that provisions under Section 2(22)(e) are deemingprovisions, and are aimed at including the obvious, orwhat is uncertain, or to impose, for the purpose of astatute, an artificial construction of a word or phrase,that would not otherwise prevail. Then the definition, asgiven in Section 2(6A)(e) was also considered, and found,that since the firm is not a shareholder of the company,the amount of Rs.10 lacs could not be assessed to tax underSection 2(22)(e). It was also found, that this amountcannot be stated to be an advance, or loan, as theagreement specifically mentions it as, security. It wasalso considered, that as on 1.4.90, the company hasaccumulated profits of Rs.44,825/- only. Thus, theingredients of the deeming clause are not satisfied. It was reiterated, that unless the firm is registered shareholderof the company, any amount of advance to the partners,cannot be taxed in the hands of the firm, as such. Thus,the appeal was dismissed. We have heard learned counsel on the questionsframed. Long drawn arguments were made on either side.However, before proceeding further, we may gainfully quotethe provisions of Section 2(22)(e), which read as under:- reiterated, that unless the firm is registered shareholderof the company, any amount of advance to the partners,cannot be taxed in the hands of the firm, as such. Thus,the appeal was dismissed. We have heard learned counsel on the questionsframed. Long drawn arguments were made on either side.However, before proceeding further, we may gainfully quotethe provisions of Section 2(22)(e), which read as under:- “2(22)(e) any payment by a company, not being acompany in which the public are substantiallyinterested, of any sum (whether asrepresenting a part of the assets of thecompany or otherwise) made after the 31[st] dayof May, 1987, by way of advance or loan to ashareholder, being a person who is thebeneficial owner of shares (not being sharesentitled to a fixed rate of dividend whetherwith or without a right to participate inprofits) holding not less than ten per centof the voting power, or to any concern inwhich such shareholder is a member or apartner and in which he has a substantialinterest (hereafter in this clause referredto as the said concern) or any payment by anysuch company on behalf, or for the individualbenefit, of any such shareholder, to theextent to which the company in either casepossesses accumulated profits” From reading of the above provision, it is clear,that it comprehends manifold requirements, the first being,the payment should be made by way of loan or advance, to the concern. Of course on this aspect, the conclusion hasbeen recorded by the Tribunal against the Revenue, but thenon bare reading of the agreement and considering thetotality of circumstances, including the very nature of theterm “security”, and the fact, that substantial portion ofthis Rs.10 lacs of amount, say more than 9 lacs, have beenadvanced only during 7.1.91 to 22.3.91, it is difficult toaccept, it as a security, in the sense of the term, ascomprehended in the agreement, rather it clearly appears tobe simply a nomenclature used, to borrow the words of theAssessing Officer “transparent cover”. Be that as it may. The more important aspect, being the requirementof Section 2(22)(e) is, that “the payment may be made toany concern, in which such shareholder is a member, or thepartner, and in which he has substantial interest, or anypayment by any such company, on behalf, or for theindividual benefit of any such shareholder...” Thus, thesubstance of the requirement is, that the payment should bemade on behalf of, or for the individual benefit of anysuch shareholder, obviously, the provision is intended toattract the liability of tax on the person, on whosebehalf, or for whose individual benefit, the amount is paidby the company, whether to the shareholder, or to theconcern firm. In which event, it would fall within theexpression “deemed dividend”. Obviously, income fromdividend, is taxable as income from other sources, under Section 56 of the Act, and in the very nature of things,the income has to be, of the person earning the income. Theassessee in the present case is not shown to be one of thepersons, being shareholder. Of course the two individualsbeing Roop Kumar and Devendra Kumar, are the commonpersons, holding more than requisite amount of shareholding, and are having requisite interest, in the firm,but then, thereby the deemed dividend would not be deemeddividend in the hands of the firm, rather it wouldobviously be deemed dividend in the hands of theindividuals, on whose behalf, or on whose individualbenefit, being such shareholder, the amount is paid by thecompany to the concern. Thus, the significant requirement of Section 2(22)(e) is not shown to exist. The liability of tax, as deemeddividend, could be attracted in the hands of theindividuals, being the shareholders, and not in the handsof the firm. Thus, the significant requirement of Section 2(22)(e) is not shown to exist. The liability of tax, as deemeddividend, could be attracted in the hands of theindividuals, being the shareholders, and not in the handsof the firm. Thus, the result of the aforesaid discussion is,that question No.2, as framed, is answered in favour of theRevenue, and against the assessee, while question No.1 isanswered against the Revenue, and in favour of theassessee, though for different reasons. questions is, that the appeal fails and is dismissed. ( DEO NARAYAN THANVI ),J. ( N P GUPTA ),J. /tarun/