Ita/113/2015 Of The Commissioner Of Income Tax v. M/S.network Systems And Technologies (P) Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT:- THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON WEDNESDAY, THE 6TH DAY OF DECEMBER 2017/15TH AGRAHAYANA, 1939 I.T.A.No.113 of 2015 -------------------------- AGAINST THE ORDER/JUDGMENT IN ITA 277/COCH/2014 DATED 14-08-2014 OFINCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHINASSESSMENT YEAR 2007-08 --------------------------- APPELLANT(S)/ RESPONDENT:--------------------------- THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM BY ADVS.SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, GOI (TAXES) RESPONDENT(S)/APPELLANT:-------------------------- M/S.NETWORK SYSTEMS AND TECHNOLOGIES P. LTD., THIRUVANANTHAPURAM. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 06-12-2017,ALONG WITH I.T.A.NO.258 OF 2015, THE COURT ON THE SAME DAY DELIVEREDTHE FOLLOWING:- I.T.A.NO.113 OF 2015 APPENDIX APPELLANT'S ANNEXURES:------------------------- RESPONDENT'S ANNEXURES:- ------------------------NIL. VKU/-[ TRUE COPY ] K. Vinod Chandran & Ashok Menon, JJ. ------------------------------------------------------- I.T.A.Nos.113 of 2015 & 258 of 2015 ------------------------------------------------------- Dated, this the 06[th] day of December, 2017 JUDGMENT Vinod Chandran, J: The Revenue is in appeal against the orders passed by the Tribunal, wherein the issue dealt with was identical and falls onan interpretation of Section 2(22)(e) of the Income Tax Act, 1961 [forbrevity “the Act”], which is extracted hereunder: “2(22)(e) any payment by a company, not being acompany in which the public are substantiallyinterested, of any sum (whether as representinga part of the assets of the company or otherwise)made after the 31[st] day of May, 1987, by way ofadvance or loan to a shareholder, being a personwho is the beneficial owner of shares (not beingshares entitled to a fixed rate of dividend whetherwith or without a right to participate in profits)holding not less than ten per cent of the votingpower, or to any concern, in which suchshareholder is a member or a partner and inwhich he has a substantial interest (hereafter inthis clause referred to as the said concern) orany payment by any such company on behalf, orfor the individual benefit, of any suchshareholder, to the extent to which the companyin either case possesses accumulated profits”.company in which the public are substantiallyinterested, of any sum (whether as representinga part of the assets of the company or otherwise)made after the 31[st] day of May, 1987, by way ofadvance or loan to a shareholder, being a personwho is the beneficial owner of shares (not beingshares entitled to a fixed rate of dividend whetherwith or without a right to participate in profits)holding not less than ten per cent of the votingpower, or to any concern, in which suchshareholder is a member or a partner and inwhich he has a substantial interest (hereafter inthis clause referred to as the said concern) orany payment by any such company on behalf, orfor the individual benefit, of any suchshareholder, to the extent to which the companyin either case possesses accumulated profits”. - 2 - The above provision seeks to take in any amounts, paid to anindividual shareholder who is also a beneficial shareholder, or anyconcern in which he is substantially interested, but not termed asdividend merely to absolve the shareholder from the liability to tax.It seeks to avoid any measure employed for distribution ofprofits of a Company, other than by way of dividend, by way ofloans or advances, directly to the shareholder or to any concern inwhich he is substantially interested or on his behalf; so as toexempt the dividend from being taxed, at the hands of theindividual shareholder. - 2 - The above provision seeks to take in any amounts, paid to anindividual shareholder who is also a beneficial shareholder, or anyconcern in which he is substantially interested, but not termed asdividend merely to absolve the shareholder from the liability to tax.It seeks to avoid any measure employed for distribution ofprofits of a Company, other than by way of dividend, by way ofloans or advances, directly to the shareholder or to any concern inwhich he is substantially interested or on his behalf; so as toexempt the dividend from being taxed, at the hands of theindividual shareholder. 2. The assessment year in both appeals are 2007-08.Brief reference to facts is required, which are as follows: InI.T.A.No.258 of 2015, one John George Nechupadom had shareholding of more than 10% in M/s.Plant Lipids Pvt. Ltd. M/s.PlantLipids Pvt. Ltd. advanced an amount of Rs.1,33,66,089/- to oneM/s.Aromatic Ingredients Pvt. Ltd. The allegation was that JohnGeorge Nechupadom had substantial interest in M/s.AromaticIngredients Pvt. Ltd., which is the assessee at whose hands theamounts were taxed as dividend, relying on the fiction under - 3 - Section 2(22)(e) of the Act. In I.T.A.No.113 of 2015, the Chairmanof one M/s.Network Systems & Technologies P. Ltd. had morethan 10% share holding in M/s.Sunfibre Optics Pvt. Ltd., the latterof whom advanced an amount of Rs.1,93,33,974/- to theassessee-Company. The Assessing Officer rejected thecontention of both the assessees that there could be no taxationof the said amounts deeming it to be a dividend at the hands ofthe assessee, since the assessee is not the shareholder of theother Company. 3. The dividend could be taxed only in the hands of theshareholder, was the contention raised; which was rejected by theAssessing Officer. On appeal, the same was reversed findingfavour with the contention raised by the assessee. The Tribunalalso confirmed the finding in the two separate appeals by theRevenue. In I.T.A.No.258 of 2015, there was also a finding thatJohn George Nechupadom did not have any substantial interestat the time of advancing the amounts. The Revenue relies on thedecision of a Division Bench of the High Court of Delhi, producedas Annexure-D, reported in Commissioner of Income-tax v. - 4 - National Travel Services [(2011) 202 Taxman 327 (Delhi)] =[(2012) 347 ITR 305 (Delhi)]. 4. The learned Senior Counsel appearing for therespondent, however, would distinguish the aforesaid judgmentwith another Division Bench judgment of the same High Court inI.T.A.No.462 of 2009 and connected matters dated 11.05.2011[Commissioner of Income Tax v. Ankitech Pvt. Ltd.]. InAnkitech Pvt. Ltd., the learned Judges had considered theimpact of the deeming provision under Section 2(22)(e) and foundthat it takes in three situations wherein a payment by a Companyin which public are not substantially interested, could be deemedto be a payment of dividend. The three situations are, when anadvance or loan is made to (i) a shareholder, who is also thebeneficial owner of shares, having more than 10% of the votingpower or (ii) any concern in which such shareholder is a memberor a partner and in which he has a substantial interest and (iii) anypayment by the Company on behalf, or for the individual benefit,of such shareholder. The amounts so paid being deemed to be adividend, could be taxed only at the hands of the shareholder was the specific finding in Ankitech Pvt. Ltd. the specific finding in Ankitech Pvt. Ltd. 5. Ankitech Pvt. Ltd. and National Travel Serviceswere authored by the same learned Judge [as His Lordship thenwas]. In National Travel Services a different situation wasconsidered insofar as the concern in which the shareholder hadsubstantial interest was a partnership firm. The partnership firmwas assessed and the objection taken was that the shares werepurchased in the name of the partners and hence the firm, thoughthe beneficial owner, was not the shareholder. Assessment couldbe made, according to the assessee under Section 2(22)(e) only ifthe shareholder was also the beneficial owner of shares. TheCourt held that a partnership having no independent existence asdistinguished from its partners, the shares could be purchased inthe name of the firm and the firm would be the beneficial owner;thus frustrating the very object of the provision in the case ofpartnerships. Relying on K.P. Varghese Vs. ITO [1981] 131 ITR597it was held that “where the plain literal interpretation of astatutory provision produces manifestly absurd and unjust resultswhich could never have been intended by the Legislature, the Court must modify the language used by the Legislature or evendo violence to it, so as to achieve obvious intention of theLegislature.” (sic:para 20). On that reasoning and the resultantinterpretation, it was found that the amounts deemed to bedividend, taxed at the hands of the partnership firm was perfectlyin order. 6. Ankitech Pvt. Ltd. stands on a different footing, which is squarely applicable to the assessee's herein, who arePrivate Limited Companies. The decision in Ankitech Pvt. Ltd.has been upheld by the Hon'ble Supreme Court in Civil AppealNo.3961 of 2013, in the following manner: “The impugned judgment and order dated11.05.2011 has relied upon a judgment of the same dateby a Division Bench of the High Court of Delhi in ITANo.462 of 2009. Having perused the judgment and having heardarguments, we are of the view that the judgment is adetailed judgment going into Section 2(22)(e) of theIncome Tax Act which arises at the correct construction ofthe said Section. We do not wish to add anything to thejudgment except to say that we agree therewith. These appeals are disposed of accordingly”. Respectfully following the decision of the High Court ofDelhi as affirmed by the Hon'ble Supreme Court, the Income TaxAppeals are rejected, answering the question in favour of theassessee and against the Revenue. There shall be no order as tocosts. vku/- [ true copy ] Sd/-K.Vinod ChandranJudge Sd/- Ashok MenonJudge CONTINUED AT PAGE NO.-8 - The I.T.A number shown as “285 of 2015” occurring onthe top of pages 2 to 7 of the common judgment dated06.12.2017 in I.T.A.Nos.113/2015 and 258/2015 is suo motucorrected and substituted as “258 of 2015” as per order dated25/01/2018 in I.T.A Nos.113/2015 and 258/2015. Sd/- Registrar (Judicial) [ true copy ]