17. Deemed dividend – Section 2(22)(e) – Decision of the Supreme Court in C.I.T., Delhi-II vs. Madhur Housing and Development Company (2018) 401 ITR 152 (SC)
National Travel Services vs. CIT (2018) 401 ITR 154 (SC)
The Assessee, a partnership firm consisted of three partners, namely, Mr. Naresh Goyal, Mr. Surinder Goyal and M/s. Jet Enterprises Private Limited having a profit sharing ratio of 35%, 15% and 50% respectively. The Assessee firm had taken a loan of Rs. 28,52,41,516/- from M/s Jetair Private Limited, New Delhi. In this Company, the Assessee subscribed to the equity capital of the aforesaid Company in the name of two of its partners, namely, Mr. Naresh Goyal and Mr. Surinder Goyal totaling 48.19 per cent of the total shareholding. Thus, Mr. Naresh Goyal and Mr. Surinder Goyal were shareholders on the Company’s register as members of the Company. They held the aforesaid shares for and on behalf of the firm, which happened to be the beneficial shareholder.
The question that arose before the Supreme Court in this appeal was, as to whether section 2(22)(e) of the Act was attracted inasmuch as a loan had been made to a shareholder, who was a person who was the beneficial owner of shares holding not less than 10% of the voting power in the Company, and whether the loan was made to any concern in which such shareholder was a partner and in which he had a substantial interest, which is defined as being an interest of 20% or more of the share of the profits of the firm.
Before the Supreme Court, the assessee relied upon the judgement of the Delhi High Court in CIT vs. Ankitech Private Limited (2012) 340 ITR 14 (Del) in which it was held that the expression “shareholder” would mean a registered shareholder and also placed on an order dated 05.10.2017 passed by the Supreme Court in Civil Appeal No. 3961 of 2013 [C.I.T., Delhi-II vs. Madhur Housing and Development Company] in which the Supreme Court had expressly affirmed the reasoning of the Delhi High Court and contended that it was clear that the firm, not being a registered shareholder, could not possibly be a person to whom section 2(22)(e) would apply.
The Supreme Court, after hearing the parties was of the view that Ankitech’s case was wrongly decided. According to the Supreme Court, “shareholder”, post amendment, had only to be a person who is the beneficial owner of shares. One cannot be a registered owner and beneficial owner in the sense of a beneficiary of a trust or otherwise at the same time. It was clear therefore that the moment there is a shareholder, who need not necessarily be a member of the Company on its register, who is the beneficial owner of shares, the section gets attracted without more. To state, therefore, that two conditions have to be satisfied, namely, that the shareholder must first be a registered shareholder and thereafter, also be a beneficial owner was not only mutually contradictory but was plainly incorrect.
The Supreme Court was prima facie of the view that the Ankitech judgement (supra) required to be reconsidered, and therefore, directed that the matter be placed before the Hon’ble Chief Justice of India in order to constitute an appropriate Bench of three learned Judges in order to have a relook at the entire question.
Note: This issue had been discussed in Closements in the BCAJ published in December, 2017 and January, 2018.
18. Wealth-tax – Valuation of asset – Section 7(2)(a) is discretionary and enabling provision to Wealth Tax Officer to adopt the method as laid down in section 7(2)(a) for a running business, but the above enabling power cannot be held as obligation or shackles on right of Assessing Officer to adopt an appropriate method
Bimal Kishore Paliwal and Ors. vs. Commissioner of Wealth Tax (2017) 398 ITR 553 (SC)
G.D. & Sons of which firm the Appellants were partners, purchased land and building in semi-constructed condition on 04.06.1965 for a sum of Rs. 8,00,000/-. The construction was completed and Cinema Theatre, Alpana started running in the premises. The Alpana Cinema property was valued by assessment books of accounts. On pending assessment of Wealth Tax of one of the partners, the Wealth Tax Officer made a reference for valuation of the Alpana Cinema to Department Valuation Officer, New Delhi by Reference dated 29.04.1976. Valuation Officer after inspecting the site submitted its report dated 26.04.1977 valuing the property for assessment year 1970-71, 1971-72, 1972-73, 1973-74 and 1974-75. Notices u/s. 17 of the Wealth Tax Act, 1957 were issued to the Appellants on 30.03.1979. Assessees got the property valued by an approved Valuer adopting income capitalisation method. The assessment order was passed by the Wealth Tax Officer in March, 1983 making assessment for the period from 1970-71 to 1974-75. The assessment was completed as per percentage of the right of different Assessees which they had in the Firm. The Assessing Officer relied on the Valuation Report submitted by the Departmental Valuer. The Assessee, aggrieved by the assessment order, filed appeal before the Appellate Assistant Commissioner of Wealth Tax. The Appellate Authority by its detailed order dated 23.01.1986 affirmed the assessment made by the Assessing Officer on the basis of valuation by land and building method. The income capitalisation method as was relied on by the Assessee was not approved.
Being aggrieved by the different assessment orders the Assessees filed Wealth Tax Appeal before the Income Tax Appellate Tribunal (ITAT), Delhi Bench, Delhi. The ITAT accepted the case of the Assessee to the effect that the proper basis for valuing the Cinema building would be capitalisation of the income. The ITAT held that since the building could be used only for film exhibition and it cannot be used for any other purpose, the method of its valuation has to be necessarily different from the one normally adopted in the case of buildings which are capable of being used as commercial buildings. The Revenue, aggrieved by the Tribunal’s order filed reference application through Department. Although, initially the same was rejected by the Tribunal, on the direction of the High Court two questions were referred to the High Court for decision.
The High Court vide its judgment and order dated 21.10.2005 answered the questions in favour of Revenue and against the Assessee. The High Court held that Wealth Tax Officer was justified in adopting the land and building method. The High Court held that yield/rent capitalisation method would not be correct method of valuation of the property in question.
The Supreme Court noted that sub-section (2) of section 7 begins with non obstante Clause which enables the Wealth Tax Officer to determine the net value of the assets of the business as a whole instead of determining separately the value of each asset held by the Assessee in such business. The language of s/s. (2) provides overriding power to the Wealth Tax Officer to adopt and determine the net value of the business having regard to the balance-sheet of such business. The enabling power has been given to Wealth Tax Officer to override the normal Rule of valuation of the properties, that is the value which it may fetch in open market, Wealth Tax Officer can adopt in a case where he may think it fit to adopt such methodology.
The Supreme Court noted that the Appellants’ submission was that the provision of section 7(2)(a) is a stand alone provision and is to be applied in all cases where Assessee is carrying on a business.
The Supreme Court however, did agree with the above submission.
The Supreme Court held that overriding power has been provided to override the normal method of valuation of property as given by s/s. 7(1) to arm the Wealth Tax Officer to adopt the method of valuation as given in s/s. (2)(a). The purpose and object of giving overriding power is not to fetter the discretion. The Wealth Tax Officer is not obliged to mandatorily adopt the method provided in section 7(2)(a) in all cases where Assessee is carrying on a business. The language of s/s. (2)(a) does not indicate that the provisions mandate the Wealth Tax Officer to adopt the method in all cases of running business.
The Supreme Court pointed out in Juggilal Kamlapat Bankers vs. ITO (1984) 145 ITR 485 (SC), it had categorically laid down that resort to section 7(2)(a) is discretionary and enabling provision to Wealth Tax Officer to adopt the method as laid down in section 7(2)(a) for a running business, but the above enabling power cannot be held as obligation or shackles on right of Assessing Officer to adopt an appropriate method.
According to the Supreme Court, in the present case reference was made to the Departmental Valuer by Assessing Officer u/s. 7(3). Thus, there was a conscious decision of the Assessing Officer to obtain the report from the Departmental Valuer. The above conscious decision itself contained the decision of Assessing Officer not to resort to section 7(2)(a). The Valuation report of Departmental Valuer had been received, which has been relied on by the Assessing Officer for assessing the Assessee in the relevant year. The Supreme Court therefore did not find any error in the order of the Assessing Officer in adopting the land and building method by making a reference to Departmental Valuer to value the property on the said method.
The Supreme Court further held that the proposition that if two reasonable constructions of taxing statute are possible, that construction which favours the assessee must be adopted, could not be read to mean that under two methods of valuation the value which is favourable to the assessee should be adopted.
19. Industrial Undertaking – Deduction u/s. 80IA – The quantum of deduction allowable u/s. 80-IA of the Act has to be determined by computing the gross total income from business, after taking into consideration all the deductions allowable Under sections 30 to 43D of the Act irrespective of the fact as to whether the Assessee has claimed the deductions allowable under sections 30 to 43D of the Act or not
Plastiblends India Limited vs. Addl. Commissioner of Income Tax, Mumbai and Ors. (2017) 398 ITR 568 (SC)
The Assessment Years involved in the appeals before the Supreme Court were 1997-98 to 2000-01. The Assessee was engaged in the business of manufacture of master batches and compounds. For this purpose, it had manufacturing undertakings at Daman Units I and II. Units I and II began to manufacture Article or things in the previous years relevant to Assessment Years 1994-95 and 1995-96 respectively. Accordingly, for the year under consideration i.e. Assessment Year 1997-98, profits of the business of both the undertakings were eligible for 100% deduction u/s. 80-IA of the Act. The Assessee did not claim depreciation while computing its income under the head profits and gains of business. Consequently, deduction u/s. 80-IA was also claimed on the basis of such profits i.e. without reducing the same by depreciation allowance. This position was accepted by the Assessing Officer (AO) in an intimation made u/s. 143(1)(a) of the Act. Likewise, for the Assessment Year 1996-97, the Assessee did not claim deduction on account of depreciation. Though this position was not accepted by the AO, the claim of the Assessee was upheld by the Tribunal.
In the Assessment Year 1997-98, from which Assessment Year the dispute had arisen, the annual accounts prepared by the Assessee for the year disclosed that it earned a net profit of Rs. 1,80,85,409/-. This was arrived at after charging depreciation of Rs. 64,98,968/- in accordance with the Companies Act, 1956. The Assessee filed its return of income for Assessment Year 1997-98 determining the gross total income at Rs. 2,46,04,962/-. The gross total income included profits and gains derived from business of undertakings I and II at Daman aggregating to Rs. 2,46,04,962/-, which profits were eligible for deduction u/s. 80-IA of the Act. After reducing the gross total income by the deductions available u/s. 80-IA, the total income was computed at Rs. Nil. The AO initiated reassessment proceedings and passed an assessment order u/s.143(3) read with section 147 computing the gross total income at Rs. 34,15,583/. Though the Assessee had disclaimed deduction in respect of depreciation, the AO allowed deduction on this account as well in respect of the same in the sum of Rs. 2,13,89,379/- while computing the profit and gains of business. After reducing the gross total income by the brought forward loss of Rs. 98,47,170/-, he determined the business loss to be carried forward to Assessment Year 1998-99 at Rs. 66,25,587/-.
Aggrieved by the said assessment order, the Assessee filed the appeal before the Commissioner of Income Tax (Appeals) {CIT(A)} urging that the AO erred in not considering the Tribunal’s decision in the Assessee’s own case for the Assessment Year 1996-97 wherein it had been held that depreciation could not be thrust on it. The CIT(A) upheld the Assessee’s submission that claim for depreciation was optional, based on the Tribunal’s order in its own case for Assessment Year 1996-97 and hence, allowed the appeal.
Aggrieved by the appellate order of the CIT(A), the AO filed an appeal before the Tribunal with the plea that CIT(A) erred in directing him to work out business profit and deduction u/s. 80-IA of the Act without taking into account the corresponding depreciation amount. The Tribunal reversed the appellate order of the CIT(A) following the decision of the High Court of Bombay in Scoop Industries P. Ltd. vs. Income-Tax Officer (2007) 289 ITR 195. Aggrieved by the Tribunal’s order, the Assessee filed the appeal thereagainst before the High Court of Bombay u/s. 260A of the Act on the basis that a substantial question of law arose for consideration. The High Court was pleased to admit the appeal.
The Division Bench of the High Court at Bombay in the Assessee’s case noticed that there was a conflict of opinion in two earlier decisions viz. Grasim Industries Ltd. vs. Assistant Commissioner of Income-Tax and Ors. (2000) 245 ITR 677, wherein it was held that the profits and gains eligible for deduction under Chapter VI-A shall be the same as profits and gains computed in accordance with the provisions of the Act and included in the gross total income and the decision in Scoop Industries P. Ltd., where it was held that depreciation whether claimed or not has to be reduced for arriving at the profits eligible for deduction under Chapter VI-A. Noticing this conflict of opinion, the matter was referred to the Full Bench, to resolve the conflict.
The Full Bench of the High Court of Bombay has upheld the stand of the Revenue, that, whilst computing a deduction under Chapter VI-A, it was mandatory to grant deduction by way of depreciation. The High Court proceeded on the basis that the computation of profits and gains for the purposes of Chapter VI-A is different from computation of profits under the head ‘profits and gains of business’. It has, therefore, concluded that, even assuming that the Assessee had an option to disclaim current depreciation in computing the business income, depreciation had to be reduced for computing the profits eligible for deduction u/s. 80-IA of the Act. The High Court concluded that section 80-IA provides for a special deduction linked with profits and is a code by itself and in so doing relied on the decisions of this Court in the case of Liberty India vs. Commissioner of Income Tax (2009) 317 ITR 218, Commissioner of Income Tax vs. Williamson Financial Services and Ors. (2008) 297 ITR 17 and Commissioner of Income Tax, Dibrugarh vs. Doom Dooma India Ltd. (2009) 310 ITR 392. The High Court proceeded on the basis that this Court in the aforementioned decisions has held that for computing such special deduction, any device adopted by an Assessee to reduce or inflate the profits of such eligible business has to be rejected. The High Court ultimately held that the quantum of deduction eligible u/s. 80-IA has to be determined by computing the gross total income from business after taking into consideration all the deductions allowable under Sections 30 to 43D including depreciation u/s. 32.
After the Full Bench answered the reference in the aforesaid manner, the appeal of the Assessee was disposed of by the Division Bench vide order dated November 03, 2009 following the aforesaid opinion of the Full Bench.
According to the Supreme Court, the singular issue which was required to be considered in these appeals pertained to claim of depreciation while allowing deduction u/s. 80-IA.
The Supreme Court noted that interpreting the provisions of section 32 of the Act (which prevailed in the relevant Assessment Years) it had in CIT vs. Mahendra Mills (2000) 243 ITR 56, held that it is a choice of an Assessee whether to claim or not to claim depreciation.
The Supreme Court observed that section 32 deals with depreciation and allows the deductions enumerated therein from the profits and gains of business or profession. Section 80-IA of the Act, on the other hand, contains a special provision for assessment of industrial undertakings or enterprises which are engaged in infrastructure development etc. The issue was as to whether claim for deduction on account of depreciation u/s. 80-IA is the choice of the Assessees or it has to be necessarily taken into consideration while computing the income under this provision.
The Supreme Court held that firstly, the Apex Court decision in the case of Mahendra Mills (supra) could not be construed to mean that by disclaiming depreciation, the Assessee can claim enhanced quantum of deduction u/s. 80IA. Secondly, the Apex Court in the case of Distributors (Baroda) P. Ltd. (supra) and in the case of Liberty India (supra) had clearly held that the special deduction under Chapter VIA has to be computed on the gross total income determined after deducting all deductions allowable under sections 30 to 43D of the Act and any device adopted to reduce or inflate the profits of eligible business has got to be rejected.
Thirdly, the Apex Court in the case of Albright Morarji and Pandit Ltd. (supra), Grasim Industries Ltd. (supra) and Asian Cable Corporation Ltd. (supra) had only followed the decisions of the Apex Court in the case of Distributors Baroda (supra). According to the Supreme Court, the quantum of deduction allowable u/s. 80-IA of the Act has to be determined by computing the gross total income from business, after taking into consideration all the deductions allowable under sections 30 to 43D of the Act.
Therefore, whether the Assessee has claimed the deductions allowable under sections 30 to 43D of the Act or not, the quantum of deduction u/s. 80IA has to be determined on the total income computed after deducting all deductions allowable under sections 30 to 43D of the Act. _
