The Principal Commissioner Of Income Tax , Vadodara 1 v. M/S. Krishna Coil Cutters Pvt. Ltd

IN THE HIGH COURT OF GUJARAT AT AHMEDABADR/TAX APPEAL NO. 516 of 2022With R/TAX APPEAL NO. 517 of 2022With R/TAX APPEAL NO. 519 of 2022 ========================================================== THE PRINCIPAL COMMISSIONER OF INCOME TAX , VADODARA 1 Versus M/S. KRISHNA COIL CUTTERS PVT. LTD ========================================================== Appearance:MR NIKUNT K RAVAL(5558) for the Appellant(s) No. 1 for the Opponent(s) No. 1 ========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 10/10/2022COMMON ORAL ORDER (PER : HONOURABLE MR. JUSTICE N.V.ANJARIA) All the three appeals filed under section 260A of the Income TaxAct, 1961, are cognate. They arise out of common order dated 6.7.2021of the Income Tax Appellate Tribunal. 1.1Since the facts are similar and issues are identical and the order iscommon, all the appeals were taken up together for hearing to be treatedfor disposal by this common order. 2.The first captioned Tax Appeal No. 516 of 2022 arises out ofcommon order in so far as it related to Income Tax Appeal No. 545 of2016 in respect of Assessment Year 2012-2013. The second Tax AppealNo. 517 of 2022 arises out of common order in so far as it related toIncome Tax Appeal No. 2491 of 2017 pertaining to Assessment Year2013-2014. The third Tax Appeal No. 519 of 2022 concerns with Income Tax Appeal No 1492 of 2014 in respect of Assessment Year2011-2012. The Tribunal took Income Tax Appeal No. 1492 of 2014 as alead case. 2.1The issue is about justification in law or otherwise of addition inrespect of deemed dividend under section 2(22)(e) of the Income TaxAct, 1961 (hereinafter referred to as ‘the Act’). 3.Taking facts from record of Tax Appeal No. 519 of 2022, thecommon respondent assessee- M/s. Krishna Coil Cutters Pvt. Ltd. filed itsreturn on income on 9.9.2011 declaring total income of Rs. 81,20,620/-.The return was processed under section 143(2) of the Act. The case wasselected for scrutiny. Notice under section 143(2) of the Act was issuedon 10.09.2012. Thereafter, notice under section 142(1) of the Act wasissued on 18.12.2012 for furnishing specific details. On behalf of theassessee, the details were furnished. 3.1The assessee company was engaged in the business ofmanufacturing and trading of HR/CR sheets and trading of M.S.Plates. Itwas stated by the Assessing Officer in the assessment order that duringthe year under consideration, the balancesheet of the assessee companyshowed unsecured loan from one Krishna Sheet Processors Pvt.Ltd. to theextent of Rs. 19,65,00,000/-. It was stated on verification of shareholding pattern of said Krishna Sheet Processors Pvt.Ltd., that theassessee was holding 21.45% of shares in the said company, which wasmore than 10% of the total share holding of the said company. It was thesay of the Assessing Officer that the said Krishna Sheet ProcessorsPvt.Ltd. was not a company in which the public was substantiallyinterested. The Assessing Officer. Therefore. stated that the loan received to the above extent from Krishna Sheet Processors Pvt.Ltd. bythe assessee company was required to be treated as deemed dividendwithin the meaning of section 2(22)(e) of the Act. Show cause notice wasissued to the assessee company to show cause as to why the said amountof Rs. 19,65,00,000/- should not be treated as deemed dividend. Replywas filed on 25.3.2013 making written submissions. 3.2For the reasons recorded in the assessment order, the AssessingOfficer included the above amount of Rs. 19,65,00,000/- as deemeddividend as above in the income of the assessee. The assessee preferredappeal before the Commissioner of Income Tax (Appeals) which took theview against the assessing officer. In another words, the appellateCommissioner reversed the additions made under section 2 (22)(e) of theAct. received to the above extent from Krishna Sheet Processors Pvt.Ltd. bythe assessee company was required to be treated as deemed dividendwithin the meaning of section 2(22)(e) of the Act. Show cause notice wasissued to the assessee company to show cause as to why the said amountof Rs. 19,65,00,000/- should not be treated as deemed dividend. Replywas filed on 25.3.2013 making written submissions. 3.2For the reasons recorded in the assessment order, the AssessingOfficer included the above amount of Rs. 19,65,00,000/- as deemeddividend as above in the income of the assessee. The assessee preferredappeal before the Commissioner of Income Tax (Appeals) which took theview against the assessing officer. In another words, the appellateCommissioner reversed the additions made under section 2 (22)(e) of theAct. 3.3The aggrieved department preferred appeal before the Income TaxAppellate Tribunal. A common order culminated in respect ofassessment year 2011-12, 2-12-13 and 2013-14. The captioned threeappeals accordingly arise therefrom. The First Appeal No. 519 of 2022 isrelatable to the order of the Income Tax Appellate Tribunal in relation toAssessment year 2011-2012. Taken from the first captioned appeal inrelation to the Assessment Year 2011-2012, he following questions areproposed claiming to be arising as substantial questions of law, (a) Whether in the facts and circumstances of the case, learned ITAThas erred in law and on facts in not upholding the addition ofRs.19,65,00,000/- made by the Assessing Officer u/s. 2(22)(e) of theIncome Tax Act in respect of unsecured loan received by the assesseefrom group concern M/s. Krishna sheet processors Pvt.Ltd.? (b) Whether in the facts and circumstances of the case, learned ITAThas erred in law and on facts inholding that the loans and advancesgiven to the assessee-company was for business purposes and that thelender company was substantially engaged in money lending activities,even though the assessee-company had failed to controvert the findingsof the Assessing Officer and failed to substantiate its claims? (c) Whether in the facts and circumstances of the case, learned ITAThas erred in law and on facts in upholding the decision of CIT(A)deleting the addition of Rs.19,65,00,000/- made by the AssessingOfficer u/s. 2(22)(e) of the Act after holding that it cannot be treated asdeemed dividend u/s 2(22)(e) of the Income-tax Act, 1961, though thepercentage of turnover of money lending is only 0.5% of total turnoverof the assessee-company and funds deployed by the lender in loans andadvances is only 46.28% which is less than 50% of the total fundsavailable and, hence, the money lending activity of Krishna SheetProcessor Pvt. Ltd. (KSPPL) cannot be termed as substantial part of itsbusiness activity and accordingly the loans and advances received by theassessee from the sister concern is not covered in the exception providedin sec. 2(22)(e) of the Income-tax Act, 1961? (d)Whether on the facts and circumstance of the case, the finding ofthe learned ITAT that money lending constitutes 'substantial business' ofthe lending company is erroneous, illegal and perverse in view of thefact that the lender company has not obtained requisite permission tocarry on money lending business ?” 3.4In Appeal No. 516 of 2022 relatable to Assessment year 2012-2013almost identical questions of law arises except the addition made by theAssessing Officer was of Rs. 14,30,10,000/- and further that in questionNo.(C), the percentage of turnover of money lending was 0.66%. In thesame way, in the third Tax Appeal related to Assessment Year 2013-14,the amount of addition involved was Rs. 6,40,00,000/- and thepercentage of turn over of money lending was 0.55%, but for thesechanges the questions proposed were the same. 4.Section 2(22) of the Act defines the ‘dividend’. Section 2(22)(e)reads as under, “"dividend" includes- 3.4In Appeal No. 516 of 2022 relatable to Assessment year 2012-2013almost identical questions of law arises except the addition made by theAssessing Officer was of Rs. 14,30,10,000/- and further that in questionNo.(C), the percentage of turnover of money lending was 0.66%. In thesame way, in the third Tax Appeal related to Assessment Year 2013-14,the amount of addition involved was Rs. 6,40,00,000/- and thepercentage of turn over of money lending was 0.55%, but for thesechanges the questions proposed were the same. 4.Section 2(22) of the Act defines the ‘dividend’. Section 2(22)(e)reads as under, “"dividend" includes- (e) any payment by a company, not being a company in which the publicare substantially interested, of any sum (whether as representing a partof the assets of the company or otherwise) [made after the 31st day ofMay, 1987, by way of advance or loan to a shareholder, being a personwho is the beneficial owner of shares (not being shares entitled to afixed rate of dividend whether with or without a right to participate inprofits) holding not less than ten per cent of the voting power, or to anyconcern in which such shareholder is a member or a partner and inwhich he has a substantial interest in this clause referred to as the saidconcern)] or any payment by any such company on behalf, or for theindividual benefit, of any such shareholder, to the extent to which thecompany in either case possesses accumulated profits; but "dividend" does not include- (i) a distribution made in accordance with sub- clause (c) or sub-clause(d) in respect of any share issued for full cash consideration, where theholder of the share is not entitled in the event of liquidation toparticipate in the surplus assets; (ia) a distribution made in accordance with sub- clause (c) or sub-clause(d) in so far as such distribution is attributable to the capitalized profitsof the company representing bonus shares allotted to its equityshareholders after the 31st day of March, 1964, (and before the 1st dayof April, 1965: (ii) any advance or loan made to a shareholder or the said concern by acompany in the ordinary course of its business, where the lending ofmoney is a substantial part of the business of the company (iii) any dividend paid by a company which is set off by the companyagainst the whole or any part of any sum previously paid by it andtreated as a dividend within the meaning of sub-clause (e), to the extentto which it is so set off: (iv) any payment made by a company on purchase of its own sharesfrom a shareholder in accordance with the provisions of section 77A ofthe Companies Act, 1956 (1 of 1956); (v) any distribution of pursuant to a demerger by the resulting companyto the shareholders of the demerged company (whether or not there is areduction of capital in the demerged company). Explanation 1.-The expression "accumulated profits", wherever it occurs in thisclause, shall not include capital gains arising before the 1st day of April,1946, or after the 31st day of March, 1948, and before the 1st day ofApril, 1956. Explanation 2-The expression "accumulated profits" in sub-clauses (a),(b), (d) and (e), shall include all profits of the company up to the date ofdistribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date ofliquidation, but shall not, where the liquidation is consequent on thecompulsory acquisition of its undertaking by the Government or acorporation owned or controlled by the Government under any law forthe time being in force, include any profits of the company prior to threesuccessive previous years immediately preceding the previous year inwhich such acquisition took place. Explanation 3. For the purposes of this clause,- -"concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company; Explanation 3. For the purposes of this clause,- -"concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company; -a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern" 5.While confirming the order of the Commissioner of Income TaxAppeal (Appeals), the Tribunal held that it was not possible to concludefrom any stand point that any addition could be made by way of deemeddividend in case of assessee. It was observed that the assessee held21.45% equity share capital of Krishna Sheet Processors Pvt.Ltd. whichwas a lender company. The lender company also held 40.83% equityshare capital of the assessee. Both the companies thus had cross share holdings. Both the companies were engaged in the similar line ofbusiness of manufacturing HR/CR sheets and trading of M.S.Plates,stated the Tribunal. Those two companies had been functioning formutual benefit. 5.1The Tribunal further observing about the case of the assessee thatthe lender company had been advancing funds to the assessee even whenthe assessee was not a share holder. The funds were being advanced tothe assessee by the said company right from Assessment Year 2009-2010and the assessee had received the funds to the extent of Rs. 4.6 crores inthe Assessment Year 2009-10. Similarly Rs. 10.90 crores were receivedin Assessment Year 2010-2011 and Rs. 9.65 crores in Assessment Yearunder consideration, that is Assessment Year 2011-2012. The assesseehad acquired significant share holding in the lender company during theyear under consideration. Thus the case of the assessee was foundbelievable that the transactions of borrowing were in the ordinary courseof business and that it was outside the purview of section 2(22)(e) of theAct. The said interest income earned by the assessee in the moneylending activity was offered by the assessee under the head businessincome. It was also observed that lender company had given funds to theassessee by way of Inter Corporate Deposits (ICDs) and the lending wasdone on the similar rate of interest on which the funds were advanced tounrelated party. 5.2The Tribunal rightly held in such factual background in favour ofthe assessee that section 2(22)(e) of the Act was not applicable. TheTribunal further finally hold that the addition was not justified, “We also simultaneously find merit in the other line of argumentadvanced on behalf of the assessee. It is case of the assessee that moneylent to the assessee was received in the ordinary course of business forfulfillment of business supply through consolidated negotiation. It isalso demonstrated by the assessee that similar advance was obtained inthe earlier years right from AY 2010-11 where assessee was not ashareholder in the lender company at all. It is also simultaneously thecase of the assessee that the lender company was substantially engagedin money lending activity. Furthermore, the lender company has chargedinterest on the loans advanced to the assessee. In these facts, the case ofthe assessee is squarely covered by the decision of the Hon'ble GujaratHigh Court in Pr. CIT v Mohan Bhagwatprasad Agrawal [2020]115 taxmann.com 69 (Gujarat) & CIT Vs. Parle Plastics Ltd. (2011) 332ITR 63 (Bombay). Section 2(22)e) of the Act requires money so lent tobe only 'substantial part of business and in contrast to the 'principalbusiness' as wrongly assumed by the AO.” 5.3In Principal Commissioner of Income Tax v/s. MohanBhagwatprasad Agrawal [(2020) 115 taxmann.com 69 (Gujarat)], thefacts were that the assessee had been holding 10% shares in twocompanies in which the public was not substantially interested. Theassessee obtained loan in form of advance from the said companies oninterest payable at market interest. The Assessing Officer noticed that themain object of both the companies was to carry out business of buildingand general construction. The Tribunal came to the conclusion that theloan advances taken by the assessee was not covered by the provisions ofsection 292209e) of the Act. 5.4This court held that where the assessee was holding mere 10%share in two companies and he obtained loan and advances from the saidcompanies on interest and the Assessing Officer treated the amount ofloan or advances to be deemed dividend to add the same in the income ofthe assessee, he was not justified in law. Both the companies wereengaged in the money lending business. The view taken by the Assessing Officer was not correct and the addition could not have been made byway of deemed dividend in the income of the assessee. 5.5The facts of the case in Mohan Bhagwatprasad Agrawal(supra) are quite comparable with the facts of the case on hand and thedecision rendered in Mohan Bhagwatprasad Agrawal (supra) squarelyapplies to the issue involved in the present case. The Income TaxAppellate Tribunal relied on Mohan Bhagwatprasad Agrawal (supra)as also on the decision of the Bombay High Court in CIT vs. ParlePlastics Ltd. [(2011) 332 ITR 63 (Bombay)]. 6.In view of the foregoing discussion and reasons, it could not besaid that any question of law much less any substantial question of law asproposed arise for consideration. The view taken by the Tribunal iseminently just, proper and legal. No other question of law arises in thefacts of the case. 7.All the three appeals are therefore liable to be dismissed. They aresummarily dismissed. (N.V.ANJARIA, J) C.M. JOSHI (BHARGAV D. KARIA, J)