Digest of important case law – January To March 2013

S 2(15):Charitable purpose-Trade business or commerce-Public utility-Activity of evolving, prescribing, standards Activities cannot be termed as business activity-Exemption was granted. (S.10) (23C).
The Bureau of Indian Standards (BIS), a sovereign entity created under the Bureau of Indian Standards Act, 1986, had been granted exemption under section 10(23C).
The Director of Income-tax (Exemption) withdrew the said exemption on the ground that activities of BIS were in the nature of business and hence, covered by the proviso to section 2(15). The assessee challenged the said order by way of Writ to the High Court, wherein it was held that, activities of Bureau of Indian Standards (BIS) in prescribing of standards of goods/articles and enforcing those standards through accreditation and continuing supervision through inspection, etc., cannot be considered as trade, business or commercial activity merely because testing procedures involves charging of fees. Accordingly allowing the Petition the DIG was directed to issue the exemption certificate under section 10(23C) of the Act.
Bureau of Indian Standards v DGIT (Exemptions) (2013) 212 Taxman 210 (Delhi) (High Court)

S.2(22) (e):Dividend- Deemed dividend-Share application money – Colour device – Not “loan or advance”, cannot be assessed as deemed dividend.
 The assessee was a beneficial shareholder of three companies named Kingston Properties P Ltd. (KPPL), New Dimensions Consultants P Ltd (NDCPL) & R. S. Estate Developers P Ltd (RSEDPL). NDCPL & RESEDPL advanced various sums of money to KPPL towards “share application money”. However, some of the advances were returned by KPPL while some were adjusted towards allotment of shares. The AO held that the transaction was a “colourable device” and a “loan and advance” which fell within the ambit of s. 2(22) (e). The said “loan and advance” was assessed as “deemed dividend” in the hands of the assessee – beneficial shareholder – following Universal Medicare Pvt. Ltd. (2010) 324 ITR 263 (Bom). The CIT (A) reversed the AO. On appeal by the department to the Tribunal HELD dismissing the appeal:
Share application money or share application advance is distinct from ‘loan or advance’. Although share application money is one kind of advance given with the intention to obtain the allotment of shares/equity/preference shares etc., such advances are innately different form the normal loan or advances specified both in section 269SS or 2(22) (e) of the Act. Unless the mala fide is demonstrated by the AO with evidence, the book entries or resolution of the Board of the assessee become relevant and credible, which should not be dismissed without bringing any adverse material to demonstrate the contrary. It is also evident that share application money when partly returned without any allotment of shares, such refunds should not be classified as ‘loan or advance’ merely because share application advance is returned without allotment of share. In the instant case, the refund of the amount was done for commercial reasons and also in the best interest of the prospective share applicant. Further, it is self-explanatory that the assessee being a ‘beneficial share holder’, derives no benefit whatsoever, when the impugned ‘share application money/advance’ is finally returned without any allotment of shares for commercial reasons. In this kind of situations, the books entries become really relevant as they show the initial intentions of the parties into the transactions. It is undisputed that the books entries suggest clearly the ‘share application’ nature of the advance and not the ‘loan or advance’. As such the revenue has merely suspected the transactions without containing any material to support the suspicion. Therefore, the share application money may be an advance but they are not advances which are referred to in section 2(22) (e) of the Act. Such advances, when returned without any allotment or part allotment of shares to the applicant/subscriber, will not take a nature of the loan merely because the same is repaid or returned or refunded in the same year or later years after keeping the money for some time with the company. So long as the original intention of payment of share application money is towards the allotment of shares of any kind, the same cannot be deemed as ‘loan or advance’ unless the mala fide intentions are exposed by the AO with evidence. (A. Y. 2002-03 to 2007-08)
DCIT v. Vikas Oberoi (Mum.) (Trib.) www.itatonline,org.

S.2(22) (e):Dividend-Deemed dividend-Loans and advances-Legal fiction does not extend to broaden the concept of shareholderto make tax loans or advances as deemed dividend in the hands of deemed share holder. (Companies Act, S.153, 187C)
Duringsearch various papers relatingshare holding pattern of Amod Stampings Pvt Ltd were seized. It was found that said company had granted loans to various companies wherein share holdings and voting power exceeded 10 percent.It was explained that on creation of Trust a part of said company were settled in favour of Trust and after excluding of shares the assessee did not have more than 10 percent voting power and the assessee had no beneficial interest in the said Trust. The Assessing Officer held that creation of Trust was an afterthoughtand taxed theamount as deemed dividend.Before Commissioner (Appeals) it was contended that as per section 153 of the Companies Acta company is not permitted to include the name of the trust in the register of members. It was also contended that the provision of section 187C have been madeineffective w.e.f.13th December, 2000 and therefore there is no requirement at present to declare beneficial interest etc., therefore suchbeneficial interest was is not declared in the register of the Company or the Registrar of the Companies. However Commissioner (Appeals) up held the addition.On appeal the Tribunal held that since the said Company was not permitted to include name of Trust in its register, name which was earlier noted as shareholders remainedsame, howeverthrougha Board meeting it was resolved to acknowledge change in vesting of shares, hence in view of the facts deemed dividendcould not be taxed in hands of assessee.Legal fiction created under section 2(22) (e) does not extend further for broadening concept of shareholder so as to tax loans or advances as ‘deemed dividend’ in hands of a ‘deeming shareholder’. (.AY. 2006-07)
Krupeshbhai N. Patel v. Dy. CIT (2013) 140 ITD 176 (Ahd.) (Trib.)

S.2(22) (e):Dividend- Deemed dividend – Credit balance in Capital account – Non-encashment of cheque the amount is credited back to company’s account cannot be assessed asdeemed dividend.
The assessee is running a proprietorship concern which was converted into private limited company. There was credit balance in capital account of the assessee in proprietorship concern against which payment was made by proprietorship concern to the assessee. However, because of conversion, cheque could not be encashed and same was returned to company which was credited to the assessee’s account by company. Subsequently money was withdrawn by the assessee. It was held that the said amount could not be treated as deemed dividend. (A.Y. 2008-09)
Dy. CIT v. Radhe Shyam Jain (2013) 140 ITR 244 (Chandigarh) (Trib.)

S.2(22) (e):Dividend-Deemed dividend – Accumulated profits – Share premium account does not partake nature of commercial profit hence not be treated as accumulated profit.
Share premium account would not partake nature of commercial profits and thus cannot be treated as accumulated profit. (A.Y. 2008-09)
Dy. CIT v. Radhe Shyam Jain (2013) 140 ITR 244 (Chandigarh) (Trib.)

S.2(22) (e):Dividend-Deemed dividend – Advance given to company in which assessee holds substantial stake is held to be deemed dividend.
AO treated advance taken by assessee from a company in which having substantial stake as deemed dividend. It was case of the assessee that since they had mortgages their properties with bank to enable company to avail finance facilities from bank, advance by company was not a gratuitous loan or advance but in return for an advantage which company had already availed on account of mortgaging of properties done by assessee. However, it was a fact on record that assessee had not produced any documents to prove fact that personal properties of assessee were actually mortgaged with the bank for sake of availing loans by company. Assessee had also not produced any correspondence made either with bank or with company towards release of properties mortgaged. Thus, revenue rightly considered advances given by company to assessee as deemed dividend. (A.Y. 2002-03, 2003-04 & 2006-07)
Dy. CIT v. B. DhanunjayaRao (2013) 140 ITD 443 (Hyd.) (Trib.)

S.2(22) (e):Dividend-Deemed dividend—Advance towards Sale of Property -Matter remanded.
The assessee is engaged in real estate development. The assessee received advance towards sale of property. The Assessing Officer treated the said amount as deemed dividend. Commissioner (Appeals) deleted the addition. On appeal by department the Tribunal seta-side the order of Commissioner(Appeals) as he failed to pass as speaking order. Matter remanded. (A.Y. 2006-07, 2007-08)
ITO v. Nam Estates P.Ltd (2013)141 ITD 659/ 21 ITR 109 (Bang.) (Trib.)

S.2(22) (e):Dividend- Deemed dividend-Loans and advances-Business of finance-Loans would not be regarded as deemed dividend.
 The company from whom the assessee had obtained loan was engaged in the business of finance and hence it was contended that the loan transaction from the company fell in the exclusionary clause and the amount of loan was out of the purview of section 2(22) (e). The Department’s contention was that financing was not a ‘major’ part of the business of the company and hence the assessee could not take shelter under the exclusionary clause. Before the Tribunal the assessee relied upon the decision of the Hon’ble Bombay High Court in CITv.Parle Plastics Ltd (2011) 332 ITR 63 (Bom.) (High Court) wherein it was held that the said expression “substantial part of the business” in s.2(22) (e), clause (ii), does not connote an idea of being the "major part" or the part that constitutes majority of the whole.It was further explained by the Hon’ble Bombay High Court that any business of a company which the company does not regard as small, trivial or inconsequential as compared to the whole of the business is substantial business and various factors and circumstances would be required to be looked into while considering whether a part of the business of a company is its substantial business. It was held that sometimes a portion which contributes a substantial part of the turnover, though it contributes relatively small portion of the profit, would be a substantial part of the business. Similarly, a portion which is relatively small as compared to the total turnover, but generates a large portion, say more than 50% of the total profit of the company would also be a substantial part of his business. In view of the said decision of the Hon’ble Bombay High Court, it was held that the assessee’s case fell in the exclusionary clause and hence section 2(22) (e) was not applicable. (A.Y. 2006-07)
Jayant H. Modi (2013)56 SOT 84 (Mum.) (Trib.)

S.2(28A): Interest – Discount charges-Deduction at source-Business income hence not liable to deduct tax at source. [S. 40(a) (i)]
The Court held that discount charges earned by assessee-financial service provider by way of discounting bill of exchange and promissory notes in favour of Indian companies is to be treated as business income, and not as interest income In favour of assessee. (A.Y.2005-06 to 2007-08)
DIT ( IT) v.Cargil TSF PTE Ltd. (2013) 212 Taxman 16 (Delhi) (High Court)

S:2(29B):Capital gains – Short-term or long-term – Purchase of property by tenantwas held to be long term. (S. (2 (42A),45)
Assessee bought the property of which she was one of the tenants. All the tenants entered into an agreement on 10th June 1999 and formed a co-operative society. The old building was demolished and a new building was constructed thereon. The tenants got possession in A.Y. 2002-03. Assessee sold her property on 17th September 2004. Held that the agreement dated 10th June 1999 itself gave interest and right in the impugned property to the assessee along with other tenants, the transaction clearly involved long-term capital gains. (A.Y. 2005-06)
Nila V. Shah(Mrs) v. ITO (2013) 83 DTR 218(Mum.) (Trib.)

S.2(47): Transfer- Shares pledged with groupcompany-A transaction in respect of transfer of share pledged with a bank to a group company can be regarded as “Transfer” for income-tax purpose so far as requirement of s.2(47) are complied with-Loss suffered is allowable.
A transaction in respect of sale of shares pledged with a bank to a group company cannot be said to be a colorable device merely on the grounds thatsuch a transaction resulted into loss to the assessee and that the requirements of section 108 of The Companies Act, 1956 regarding registration of transfer of shares have not been complied with since the share were in possession of a bank owing to which such shares could not have been said to be transferred. So far as the requirements of section 2(47) of the Act are complied with the transaction is to be regarded as “Transfer” for the income-tax purposes. There is no restriction that such a transaction cannot be effected with a group company. Also it is not open for the revenue to doubt the loss suffered by the assessee unless it doubts the sale prices of the shares. (T.A. No. 260 of 2000, dated 07/08/2012)]
 Biraj Investment Pvt. Ltd. (2012) BCAJ –November – Pg. 402 (Guj.) (High Court)