The Commissioner Of Income Taxchennai v. M/S.farida Holdings Pvt Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS Coram The Honourable Mr.Justice M.JAICHANDREN and The Honourable Mrs.Justice S.VIMALA Tax Case Appeal No.890 of 2015 The Commissioner of Income TaxChennai ... Appellant/Appellant -vs- M/s.Farida Holdings Pvt Ltd.,151/4, Mount Poonamallee RoadRamapuram, Chennai – 600 089... Respondent/Respondent Tax Case (Appeal) filed under Section 260 A of the IncomeTax Act, 1961 against the order of the Income Tax AppellateTribunal Madras B Bench, Chennai, dated 19.2.2014 inI.T.A.No.2206/Mds/2013 against the order of the Commissioner ofIncome Tax (Appeals)-II, Chennai-34 dated 27.8.2013 and made inITA Nos.1570 & 1571 and 1572 of 2013-14 for the Assessment year2006-07, 2007-08 and 2008-09 against the order of the DeputyCommissioner of Income Tax Company Circle-II (1) Chennai dated18.12.2012 and made in G.I.R No./PAN: for theAssessment year 2006-07. For appellant : Mr.T.R.Senthil Kumar Senior Standing Counsel for Income Tax J U D G M E N T The tax case appeal has been filed challenging the orderpassed by the Income Tax Appellate Tribunal, 'B' Bench, Chennai,Madras Bench, dated 19.2.2014, made in I.T.A.Nos.2206/Mds/2013,by raising the following substantial question of law: “Whether on the facts and in the circumstances ofthe case, the Tribunal was right in deleting theaddition made by the Assessing Officer towards deemeddividend under Section 2(22)(e) of the Income Tax Act?” https://hcservices.ecourts.gov.in/hcservices/ 2. It has been stated that the assessee Company had filedits return of income, for the assessment year 2007-08, on30.10.2007, admitting a total income of Rs.5,04,000/-. Thereturn was processed, under Section 143(1) of the Income TaxAct, 1961 (hereinafter referred to as 'the Act'), on 21.10.2008.As the assessee is a holding company having 100% shareholding inall the subsidiary companies and in view of the provisions ofSection 2(22)(e) of the Act, a notice under Section 148 of theAct had been issued to the assessee, on 13.3.2012. By a letter,dated 29.3.2012, the assessee had requested the revenue to treatthe return filed earlier by the assessee as compliance of thenotice issued under Section 148 of the Act. The assessee hadsought the reason for the reopening of the assessment and it hadbeen provided to the assessee by way of a department letter,dated 14.11.2012. Thereafter, a notice under Section 143(2) ofthe Act was issued, on 16.11.2012. Thereafter, the assessmenthad been finalised. 3. The following are the 100% subsidiary of the assessee company. 4. On a perusal of the balance sheet, it had been noted thatthe subsidiary companies had shown surplus amount, as on31.3.2007. Insofar as Farida Shoes Classic P Ltd., it wasRs.25,45,48,848/-. Farida Newline Studio Ltd., it wasRs.2,76,382/- and for Farida Leatherwear P Ltd, it was a sum of Rs.1,86,94,717/- and for Kenmore Shoes P Ltd., it wasRs.1,57,97,920/- and for Rivera Shoes P Ltd., it wasRs.17,23,998/- and for Stand Ford P Ltd., an amount ofRs.1,66,29,246/- has been shown as surplus. 5. It has been further stated that an explanation was soughtfrom the assessee as to why it was not a deemed dividend, ascontemplated under Section 2(22)(e) of the Act. The objectionsubmitted by the assessee had been considered and it had beenrejected by the assessing officer holding that the Section hadcontemplated under four classes of payment. The said sectionprescribes two basic conditions in order to bring thetransaction under the category of deemed dividend. Rs.1,86,94,717/- and for Kenmore Shoes P Ltd., it wasRs.1,57,97,920/- and for Rivera Shoes P Ltd., it wasRs.17,23,998/- and for Stand Ford P Ltd., an amount ofRs.1,66,29,246/- has been shown as surplus. 5. It has been further stated that an explanation was soughtfrom the assessee as to why it was not a deemed dividend, ascontemplated under Section 2(22)(e) of the Act. The objectionsubmitted by the assessee had been considered and it had beenrejected by the assessing officer holding that the Section hadcontemplated under four classes of payment. The said sectionprescribes two basic conditions in order to bring thetransaction under the category of deemed dividend. 6. It had been further stated that only loans and otherpayments made therein can be deemed dividend and to the extentthat the company has accumulated profit on the date of thepayment. Relying on the decision of the Supreme Court, in SADHNATEXTILE P LTD Vs. CIT (188 ITR 318) and the decisions of thevarious High Courts and the Supreme Court, as well as that ofthe Tribunal of the Mumbai Bench relating to the issue concernedand by referring to the circular No.495, dated 22.9.1987 issuedby the CBDT, the assessing officer had held that the manner ofutilisation of the loans received by the assessee company, fromits subsidiary companies, diverting the loan, as advance, to theloss making subsidiary company, would not make any difference inthe eye of law, as the amount received was assessable as deemeddividend under Section 2(22)(e) of the Act and therefore, anamount of Rs.18,86,400/- received by the assessee company, as aloan, from the subsidiary companies, had been treated as deemeddividend in the hands of the assessee company and therefore, thesaid amount had been added to the total income, under the head'other sources'. Accordingly, the assessing officer had arrivedat the taxable income of the assessee as Rs.23,90,400/-. 7. Aggrieved by the decision of the assessing officer, anappeal had been filed before the Commissioner of Income Tax(Appeals)-II, Chennai. By an order, dated 27.8.2013, theCommissioner of Income Tax (Appeals)-II, Chennai, had allowedthe appeal filed by the assessee, following an earlier decisionrelating to the case of the assessee. Aggrieved by the same, theRevenue had filed an appeal before the Income Tax AppellateTribunal, 'B' Bench, Chennai. The Tribunal had dismissed theappeal, confirming the order passed by the Commissioner ofIncome Tax (Appeals)-II, Chennai. 8. Aggrieved by the same, the Revenue has filed the presentappeal, before this Court, under Section 260 A of the Income TaxAct, 1961, based on the following grounds: https://hcservices.ecourts.gov.in/hcservices/ “a) The Tribunal missed to note the intention ofthe legislature is to tax the accumulated profit if itis utilized without paying the tax on it by the closelyheld group company. In the present case, the profitmaking subsidiary company utilized the accumulatedprofits without paying tax on the same. b) The Tribunal failed to note that the conditionsspecified under Section 2(22)(e) such payment ofloans/payments to shareholders who are beneficial ownerof shares and when there are accumulated profits theconditions being fulfilled invoking of Section 2(22)(e)would be attracted. c) The Tribunal erred in not considering the factthat the assessee company has transaction with itssubsidiary companies only and there were no outsidefinancing activity other than the subsidiary companies. d) The Tribunal missed to note that for being aNBFC approval of the Reserve Bank of India is a mustand the same was not produced before the AO. b) The Tribunal failed to note that the conditionsspecified under Section 2(22)(e) such payment ofloans/payments to shareholders who are beneficial ownerof shares and when there are accumulated profits theconditions being fulfilled invoking of Section 2(22)(e)would be attracted. c) The Tribunal erred in not considering the factthat the assessee company has transaction with itssubsidiary companies only and there were no outsidefinancing activity other than the subsidiary companies. d) The Tribunal missed to note that for being aNBFC approval of the Reserve Bank of India is a mustand the same was not produced before the AO. e) The Tribunal ought to have seen that once theconditions prescribed under Section 2(22)(e) arefulfilled and the assessee holding more than 10% votingpower and being the only shareholder of the subsidiarycompany and as per Section 2(31) defines a person whichinclude a company and receive loans and advances fromits subsidiary and therefore Section 2(22)(e) wasattracted. Since the funds were available with thecompany in the form of profits the controlling groupdid not distribute the accumulated profit as dividendto the shareholders so as to avoid the payment of taxon accumulated profits. f) The Tribunal failed to note that the assesseecompany is a shareholder having 100% shareholding inthe subsidiary company receives loans from the profitmaking subsidiary company which would clearly show thatthe accumulated profits were utilized by the group ofcompanies without paying tax on the accumulated profitsavailable with them. g) The Tribunal missed to note that once theholding company receives advances from its subsidiaryout of the accumulated profits Section 2(22)(e) wasattracted and the further transfer to its subsidiary is only an application of funds which no way restrict thepower of AO to invoke the provisions of Section 2(22)(e) in the hands of the holding company. h) The Tribunal failed to note that for theassessment year 2005-06 on similar issue the departmenthas filed an SLP against the decision of the Hon'bleHigh Court and the matter is pending before the SupremeCourt and the same has not attained finality.” 9. At this stage of the hearing of the appeal, the learnedcounsel appearing for the respondent/assessee had placed beforethis Court an order passed by the Division Bench of this Court,dated 17.6.2013, made in Tax Case (Appeal) No.16 of 2010. Thesaid order reads as follows: “The above Tax Case (Appeal) is filed at theinstance of the Revenue against the order of the IncomeTax Appellate Tribunal for the assessment year 2005-06by raising following substantial question of law: "Whether on the facts and circumstances of the case,the Appellate Tribunal was right in law that it is nota fit case for treating the advance inter sesubsidiaries of the assessee holding company, as thedeemed dividend in the hands of the assessee company?" 9. At this stage of the hearing of the appeal, the learnedcounsel appearing for the respondent/assessee had placed beforethis Court an order passed by the Division Bench of this Court,dated 17.6.2013, made in Tax Case (Appeal) No.16 of 2010. Thesaid order reads as follows: “The above Tax Case (Appeal) is filed at theinstance of the Revenue against the order of the IncomeTax Appellate Tribunal for the assessment year 2005-06by raising following substantial question of law: "Whether on the facts and circumstances of the case,the Appellate Tribunal was right in law that it is nota fit case for treating the advance inter sesubsidiaries of the assessee holding company, as thedeemed dividend in the hands of the assessee company?" 2. The assessee which is a holding company has100% share in subsidiary companies. The assessee filedits return of income on 12.10.2003 for the assessmentyear disclosing loss of Rs.9,05,970/-. Thereafter, thecase was selected for scrutiny and notice under Section143(2) of the Income Tax Act was issued calling forcertain details. The assessee company furnished thedetails about the subsidiary companies and the sharesheld by the assessee company in the same. As per theparticulars, there were eleven subsidiary companies inwhich the assessee company is holding 100% shares. Theparticulars furnished by the assessee company alsorevealed that the assessee company received loans fromsome of the subsidiaries and advanced money to some ofthe subsidiaries. On the basis of the particulars sofurnished by the assessee, ledger accounts of all thesubsidiary companies were also verified and theverification revealed that the amount advanced to theassessee by subsidiaries is from and out of theaccumulated profits. Thereafter, the assessee wasasked to show cause as to why the loans received by theassessee company from its subsidiaries should not be treated as deemed dividend under Section 2(22)(e) ofthe Income Tax Act. The assessee filed its reply on3.12.2007, wherein it is stated that the amountsreceived by the assessee from its subsidiary companiesare for the purpose of advancing amounts to subsubsidiaries without any benefit of interest beingderived by the assessee company and cannot be treatedas dividend amount under Section 2(22)(e) of the IncomeTax Act. However, the Assessing Officer arrived at theconclusion that the assessee company had receivedloans in cash from its subsidiary companies to the tuneof Rs.2,92,39,206/- and treated the transactions asloan transactions covered under Section 2(22)(e) of theIncome Tax Act. The Assessing Officer thus rejected theassessee's contention that the provisions of Section 2(22)(e) of the Income Tax Act would not be applicableto the assessee's case and added the same as additionin the income of the assessee and passed an order byassessing the said income by way of reassessment underSection 143(3)(ii) of the Income Tax Act. Aggrievedagainst the same, the assessee preferred an appealbefore the Commissioner of Income Tax (Appeals). TheCommissioner of Income Tax (Appeal) reversed thefinding of the Assessing Officer on the ground thatthere is no evidence to hold that the assessee companyreceived any benefit in the transactions involvingadvances within the subsidiary companies. Onexamination it would reveal that the advances by theadvance giving subsidiary companies are from out oftheir profits and these advances were not interestbearing and partly allowed the appeal by holding thatimpugned addition of Rs.2,92,39,206/- was unwarrantedand deleted the same. Aggrieved against the same, theRevenue went on appeal before the Income Tax AppellateTribunal. The Tribunal also confirmed the finding ofthe Commissioner of Income Tax (Appeal). Hence, thepresent appeal by the Revenue. 3. The Commissioner of Income Tax (Appeals) andthe Appellate Tribunal, on the basis of the availableparticulars, categorically came to the conclusion thatthe assessee company is only a intermediary between thetwo subsidiary companies and no beneficial interest hasbeen accrued to the assessee company by the advancesbetween the subsidiary companies and sub subsidiarycompanies. Consequently, the ingredients of Section 2(22)(e) of the Income Tax Act is not attracted. 4. In the circumstances, we hold that the orderpassed by the Income Tax Appellate Tribunal confirmingthe order of the Commissioner of Income Tax (Appeals) does not call for interference. The above Tax CaseAppeal is therefore, dismissed. No costs.” 10. The learned counsel appearing for the appellant, whilereiterating the grounds raised on which appeal had been filed,has also submitted that the Revenue had challenged the orderpassed by the Division Bench of this Court, dated 17.6.2013,made in Tax Case (Appeal) No.16 of 2010, before the SupremeCourt, in S.L.P.No.1358 of 2013 and that the matter is pendingdisposal. 11. In view of the submissions made by the learned counselappearing for the appellant and in view of the decision of theDivision Bench of this Court, dated 17.6.2013, made in Tax Case(Appeal) No.16 of 2010, we are of the considered view that theRevenue has not shown sufficient cause or reason to interferewith the order passed by the Income Tax Appellate Tribunal, 'B'Bench, Chennai, confirming the order passed by the theCommissioner of Income Tax (Appeals)-II, Chennai. Accordingly,the Tax Case Appeal is dismissed. Connected M.P.No.1 of 2015 isclosed. No costs. Sd/- Assistant Registrar(CS VI) //True Copy// Sub Assistant Registrar To 1.The Commissioner of Income Tax(Appeals)-II,Chennai-34. 2.The Deputy Commissioner of Income Tax Circle-II,Chennai. 3.The Income Tax Appellate Tribunal,Madras 'B' Bench,Chennai. +1cc to M/S.T.R.Senthilkumar, Advocate sr.64983 Tax Case Appeal No.890 of 2015 ad(CO)srg(01/03/2016)