The Commissioner of Income-tax, Thiruvananthapuram v. Network Systems and Technologies P. Ltd
[Citation -2017-LL-1206-11]

Citation 2017-LL-1206-11
Appellant Name The Commissioner of Income-tax, Thiruvananthapuram
Respondent Name Network Systems and Technologies P. Ltd.
Court HIGH COURT OF KERALA AT ERNAKULAM
Relevant Act Income-tax
Date of Order 06/12/2017
Judgment View Judgment
Keyword Tags beneficial shareholder • deeming provision • partnership firm • beneficial owner • voting power • advance • deemed dividend • accumulated profit
Bot Summary: ITA Nos.113 -2- 285 of 2015 The above provision seeks to take in any amounts, paid to an individual shareholder who is also a beneficial shareholder, or any concern in which he is substantially interested, but not termed as dividend merely to absolve the shareholder from the liability to tax. The Assessing Officer rejected the contention of both the assessees that there could be no taxation of the said amounts deeming it to be a dividend at the hands of the assessee, since the assessee is not the shareholder of the other Company. The dividend could be taxed only in the hands of the shareholder, was the contention raised; which was rejected by the Assessing Officer. The three situations are, when an advance or loan is made to a shareholder, who is also the beneficial owner of shares, having more than 10 of the voting power or any concern in which such shareholder is a member or a partner and in which he has a substantial interest and any payment by the Company on behalf, or for the individual benefit, of such shareholder. The amounts so paid being deemed to be a dividend, could be taxed only at the hands of the shareholder was ITA Nos.113 -5- 285 of 2015 the specific finding in Ankitech Pvt. Ltd. 5. In National Travel Services a different situation was considered insofar as the concern in which the shareholder had substantial interest was a partnership firm. Assessment could be made, according to the assessee under Section 2(22)(e) only if the shareholder was also the beneficial owner of shares.


IN HIGH COURT OF KERALA AT ERNAKULAM PRESENT:- HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & HONOURABLE MR. JUSTICE ASHOK MENON WEDNESDAY, 6TH DAY OF DECEMBER 2017/15TH AGRAHAYANA, 1939 I.T.A.No.113 of 2015 AGAINST ORDER/JUDGMENT IN ITA 277/COCH/2014 DATED 14-08-2014 OF INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN ASSESSMENT YEAR 2007-08 APPELLANT(S)/ RESPONDENT:- 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, COURT ON SAME DAY DELIVERED FOLLOWING:- I.T.A.NO.113 OF 2015 APPENDIX APPELLANT'S ANNEXURES:- ANNEXURE-A TRUE COPY OF ORDER UN/S.143(3) OF INCOME TAX ACT, 1961 OF ASSESSING OFFICER DATED 28.12.2010. ANNEXURE-B TRUE COPY OF ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) DATED 20.02.2014. ANNEXURE-C TRUE COPY OF ORDER OF APPELLATE TRIBUNAL, DATED 14.08.2014. ANNEXURE-D I.T.A.T. ORDER REPORTED IN SKYLINE (24SOT) 402. ANNEXURE-E I.T.A.T. ORDER REPORTED IN EXTEMPOREE (116 TTJ 525). 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 06th day of December, 2017 JUDGMENT Vinod Chandran, J: Revenue is in appeal against orders passed by Tribunal, wherein issue dealt with was identical and falls on interpretation of Section 2(22)(e) of Income Tax Act, 1961 [for brevity Act ], which is extracted hereunder: 2(22)(e) any payment by company, not being company in which public are substantially interested, of any sum (whether as representing part of assets of company or otherwise) made after 31st day of May, 1987, by way of advance or loan to shareholder, being person who is beneficial owner of shares (not being shares entitled to fixed rate of dividend whether with or without right to participate in profits) holding not less than ten per cent of voting power, or to any concern, in which such shareholder is member or partner and in which he has substantial interest (hereafter in this clause referred to as said concern) or any payment by any such company on behalf, or for individual benefit, of any such shareholder, to extent to which company in either case possesses accumulated profits . ITA Nos.113 & -2- 285 of 2015 above provision seeks to take in any amounts, paid to individual shareholder who is also beneficial shareholder, or any concern in which he is substantially interested, but not termed as dividend merely to absolve shareholder from liability to tax. It seeks to avoid any measure employed for distribution of profits of Company, other than by way of dividend, by way of loans or advances, directly to shareholder or to any concern in which he is substantially interested or on his behalf; so as to exempt dividend from being taxed, at hands of individual shareholder. 2. assessment year in both appeals are 2007-08. Brief reference to facts is required, which are as follows: In I.T.A.No.258 of 2015, one John George Nechupadom had share holding of more than 10% in M/s.Plant Lipids Pvt. Ltd. M/s.Plant Lipids Pvt. Ltd. advanced amount of Rs.1,33,66,089/- to one M/s.Aromatic Ingredients Pvt. Ltd. allegation was that John George Nechupadom had substantial interest in M/s.Aromatic Ingredients Pvt. Ltd., which is assessee at whose hands amounts were taxed as dividend, relying on fiction under ITA Nos.113 & -3- 285 of 2015 Section 2(22)(e) of Act. In I.T.A.No.113 of 2015, Chairman of one M/s.Network Systems & Technologies P. Ltd. had more than 10% share holding in M/s.Sunfibre Optics Pvt. Ltd., latter of whom advanced amount of Rs.1,93,33,974/- to assessee-Company. Assessing Officer rejected contention of both assessees that there could be no taxation of said amounts deeming it to be dividend at hands of assessee, since assessee is not shareholder of other Company. 3. dividend could be taxed only in hands of shareholder, was contention raised; which was rejected by Assessing Officer. On appeal, same was reversed finding favour with contention raised by assessee. Tribunal also confirmed finding in two separate appeals by Revenue. In I.T.A.No.258 of 2015, there was also finding that John George Nechupadom did not have any substantial interest at time of advancing amounts. Revenue relies on decision of Division Bench of High Court of Delhi, produced as Annexure-D, reported in Commissioner of Income- tax v. ITA Nos.113 & -4- 285 of 2015 National Travel Services [(2011) 202 Taxman 327 (Delhi)] = [(2012) 347 ITR 305 (Delhi)]. 4. learned Senior Counsel appearing for respondent, however, would distinguish aforesaid judgment with another Division Bench judgment of same High Court in I.T.A.No.462 of 2009 and connected matters dated 11.05.2011 [Commissioner of Income Tax v. Ankitech Pvt. Ltd.]. In Ankitech Pvt. Ltd., learned Judges had considered impact of deeming provision under Section 2(22)(e) and found that it takes in three situations wherein payment by Company in which public are not substantially interested, could be deemed to be payment of dividend. three situations are, when advance or loan is made to (i) shareholder, who is also beneficial owner of shares, having more than 10% of voting power or (ii) any concern in which such shareholder is member or partner and in which he has substantial interest and (iii) any payment by Company on behalf, or for individual benefit, of such shareholder. amounts so paid being deemed to be dividend, could be taxed only at hands of shareholder was ITA Nos.113 & -5- 285 of 2015 specific finding in Ankitech Pvt. Ltd. 5. Ankitech Pvt. Ltd. and National Travel Services were authored by same learned Judge [as His Lordship then was]. In National Travel Services different situation was considered insofar as concern in which shareholder had substantial interest was partnership firm. partnership firm was assessed and objection taken was that shares were purchased in name of partners and hence firm, though beneficial owner, was not shareholder. Assessment could be made, according to assessee under Section 2(22)(e) only if shareholder was also beneficial owner of shares. Court held that partnership having no independent existence as distinguished from its partners, shares could be purchased in name of firm and firm would be beneficial owner; thus frustrating very object of provision in case of partnerships. Relying on K.P. Varghese Vs. ITO [1981] 131 ITR 597 it was held that where plain literal interpretation of statutory provision produces manifestly absurd and unjust results which could never have been intended by Legislature, ITA Nos.113 & -6- 285 of 2015 Court must modify language used by Legislature or even do violence to it, so as to achieve obvious intention of Legislature. (sic:para 20). On that reasoning and resultant interpretation, it was found that amounts deemed to be dividend, taxed at hands of partnership firm was perfectly in order. 6. Ankitech Pvt. Ltd. stands on different footing, which is squarely applicable to assessee's herein, who are Private Limited Companies. decision in Ankitech Pvt. Ltd. has been upheld by Hon'ble Supreme Court in Civil Appeal No.3961 of 2013, in following manner: impugned judgment and order dated 11.05.2011 has relied upon judgment of same date by Division Bench of High Court of Delhi in ITA No.462 of 2009. Having perused judgment and having heard arguments, we are of view that judgment is detailed judgment going into Section 2(22)(e) of Income Tax Act which arises at correct construction of said Section. We do not wish to add anything to judgment except to say that we agree therewith. These appeals are disposed of accordingly . ITA Nos.113 & -7- 285 of 2015 Respectfully following decision of High Court of Delhi as affirmed by Hon'ble Supreme Court, Income Tax Appeals are rejected, answering question in favour of assessee and against Revenue. There shall be no order as to costs. Sd/- K.Vinod Chandran Judge Sd/- Ashok Menon Judge /- [ true copy ] Commissioner of Income-tax, Thiruvananthapuram v. Network Systems and Technologies P. Ltd
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