RASOI TRADING & AGENCIES (P) LTD. v. INCOME TAX OFFICER
[Citation -2006-LL-0131-8]

Citation 2006-LL-0131-8
Appellant Name RASOI TRADING & AGENCIES (P) LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 31/01/2006
Assessment Year 1998-99
Judgment View Judgment
Keyword Tags credit for tax deducted at source • hindu undivided family • individual capacity • interest-free loan • loan transaction • overriding title • interest income • karta
Bot Summary: The assessee entered into an agreement on 11-9- 1990 with Payal Investment Trading Ltd., under which the assessee advanced a loan of Rs. 93,50,000 by way of loan which was interest-free. The Assessing Officer considered the terms of the agreement and then came to the conclusion that it was mere a loan transaction and consequently the income received by the assessee could not be classified as dividend income. As a result thereof, this income was assessed as business income of the assessee and the exemption claimed by the assessee was denied. The Learned Counsel for the assessee has reiterated the stand taken by the assessee before the lower authorities. The preamble of the agreement shows that the borrower made the request to the assessee for advancing of loan and in pursuance of that request the sum of Rs. 93.50 lakhs was given by the assessee to the borrower. The only question for our consideration is whether the income received by the assessee can be said to be dividend income. The learned counsel for the assessee has pressed into service of rule 30A of the Rules, in support of the proposition that assessee is a beneficial owner of the shares in terms of the agreement.


only issue arising in this appeal is whether sum of Rs. 10,67,660 received by assessee in terms of agreement executed with Payal Investment & Trading Ltd., can be treated as dividend income. 2. Briefly stated facts are these: assessee was engaged in business of providing loans. assessee entered into agreement on 11-9- 1990 with Payal Investment & Trading Ltd., under which assessee advanced loan of Rs. 93,50,000 by way of loan which was interest-free. Clause 2 of agreement provided that said loan shall be utilised by borrower only for purpose of purchasing equity shares to be issued by LML Ltd. of Kanpur. Clause 6 provided that borrower shall pay to assessee 50 per cent of amount of dividend received by it from LML Ltd. from time to time in respect of equity shares to be purchased. borrower of loan purchased shares o f LML Ltd. but did not receive any dividend till assessment year 1997-98. However, in year under consideration, dividend was received in respect of such shares and 50 per cent of amount of dividend amounting to Rs. 10,66,660 was paid by borrower to assessee in terms of agreement. This amount was declared as dividend income for assessment year 1998-99. It also claimed exemption under section 115-O of Income-tax Act, 1961 ('Act'). Assessing Officer considered terms of agreement and then came to conclusion that it was mere loan transaction and consequently income received by assessee could not be classified as dividend income. As result thereof, this income was assessed as business income of assessee and exemption claimed by assessee was denied. 3. matter was carried in appeal before whom it was contended that assessee had overriding title to dividend received by Payal Investment & Trading Ltd. and, therefore, such income should be treated as dividend income. It also relied on rule 30A of Income-tax Rules, 1962 ('Rules') in support of contention that credit for tax deducted at source to person other than shareholder is allowable. In view of same, it was contended that assessee was beneficial owner of shares by virtue of overriding title and consequently income received was in nature of dividend. Learned CIT(A) rejected contentions raised by assessee. Aggrieved by said order, assessee is in further appeal before Tribunal. 4. Learned Counsel for assessee has reiterated stand taken by assessee before lower authorities. He drew our attention to various terms o f agreement to point out that amount was advanced by assessee with specific purpose i.e., for purchase of shares of LML Ltd. Instead of getting interest, assessee entered into agreement with borrower to effect that 50 per cent of dividend income earned on such investment would be paid by borrower to assessee. Thus, assessee had overriding title over dividend income earned by Payal Investment & Trading Ltd. In view of same, it was pleaded that income so received should be considered as dividend income. He also referred to rule 30A in support of his contention. On other hand, Learned Departmental Representative has supported order of Learned CIT(A) by submitting that transaction under agreement was purely loan transaction and, therefore, any amount received as income was nothing but interest income. According to him, income received was nothing but compensation for use of money and, therefore, same has to be treated as interest income and not dividend income. It was also submitted by him that dividend income has to be assessed only in hands of shareholder. Since assessee was never shareholder, question of treating such income as dividend income does not arise. 5. Rival submissions of parties have been considered carefully. We have gone through terms of agreement. preamble of agreement shows that borrower made request to assessee for advancing of loan and in pursuance of that request sum of Rs. 93.50 lakhs was given by assessee to borrower. Clause 1 of agreement treats this amount as loan. Clause 2 also says that this loan shall be utilised by borrower for purpose of purchase of equity shares to be issued by LML Ltd. Clause 3 provides that in case equity shares are not issued by LML Ltd. for any reason by 31-3-1991, then borrower shall forthwith refund to assessee entire amount of loan and in case of delay, assessee shall be entitled to interest at rate of 15 per cent. Clause 4 provides that such advance was interest-free loan and borrower shall not be liable to pay interest except as provided in clause 3. Clause 5 provides that such loans shall be repaid by borrower in 10 years in 40 equal provides that such loans shall be repaid by borrower in 10 years in 40 equal instalments of Rs. 2,33,750. Clause 6 provides that assessee shall be entitled to 50 per cent of amount of dividend received by borrower from LML Ltd. from time to time. Clause 9 provides that in event of default by borrower, assessee shall be entitled to demand immediate repayment of entire amount of loan. All these clauses read together lead to only conclusion that transaction under agreement was merely loan transaction and consideration was 50 per cent of dividend income instead of regular payment of interest. It is not necessary for us to record finding whether there was overriding title or not. only question for our consideration is whether income received by assessee can be said to be dividend income. dividend income has been defined by section 2(22) of Act. According to this section, dividend includes distribution of amount to shareholder. It is only sub-clause (e) of section 2(22) of Act that person other than shareholder can be assessed by way of dividend income by virtue of deemed provisions. Admittedly, clause (e) is not applicable to present case. Since assessee is not shareholder of shares of LML Ltd., any amount received from Payal Investment & Trading Ltd., cannot be treated as dividend income. learned counsel for assessee has pressed into service of rule 30A of Rules, in support of proposition that assessee is beneficial owner of shares in terms of agreement. We are unable to accept this contention of assessee's counsel. person can be said to be beneficial owner of shares only where shares are subscribed or purchased on behalf of such person. In such cases, beneficial owner need not be registered shareholder. For example, Hindu Undivided Family (HUF) may purchase shares through Karta of HUF. In such cases, though karta in his individual capacity may be shareholder but in legal terms, HUF is beneficial owner. Similarly, Trust may purchase shares through Trustees and firm may purchase shares through partners. These are cases where concept of beneficial ownership may arise. But in present case, shares were not purchased on behalf of assessee. On other hand, shares were purchased by Payal Investment & Trading Ltd., in its own right and there was no clause in agreement which may put fetter on right of Payal Investment & Trading Ltd. to dispose of shares. borrower was free to dispose of shares without consent of assessee. assessee was only entitled to refund of loan amount, in case 50 per cent of dividend income was not paid by borrower to assessee or where instalments were not paid in time. No right vested in assessee in shares purchased by borrower. Further, there is no clause in agreement under which assessee was required to bear any loss in case loss is incurred on sale of shares. Therefore, in our considered opinion, assessee could not be treated as beneficial owner of shares. Hence, by any logic, income received by assessee could not be treated as dividend income. Since assessee was in business of providing loans, in our opinion, income was rightly assessed by Assessing Officer as business income. order of Learned CIT(A) is, therefore, upheld. 6. In result, appeal of assessee stands dismissed. *** RASOI TRADING & AGENCIES (P) LTD. v. INCOME TAX OFFICER
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