No deemed dividend if shareholding of a common shareholder is less than 20%

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IN THE ITAT MUMBAI BENCH ‘A’

Income-tax Officer-2(1)(1)

v.

Anand Rathi Direct India (P.) Ltd.

IT APPEAL NO. 2556 (MUM.) OF 2010

[ASSESSMENT YEAR 2006-07]

MAY 4, 2012

The Assessing Officer had considered that a common shareholder ‘P’ has substantial shareholding of more than 10 per cent. While analyzing substantial interest, the Assessing Officer has only considered Explanation 3 with reference to a person having beneficial interest entitled to not less than 20 per cent of income of such concern so as to attract provisions of section 2(22)(e). However, the Assessing Officer has not examined definition given in section 2(32) with reference to company which has a substantial interest in company, wherein it was specifically mentioned of carrying not less than 20 per cent of voting power. Admittedly, ‘P’ has less than 20 per cent shareholding in both companies, i.e., assessee as well as ‘A’. Therefore, reasoning given by Assessing Officer of a common shareholding by ‘P’ does not hold good. Further, it is an admitted fact that assessee is not owning any share in ‘A’ and provisions of section 2(22)(e) do not apply unless assessee is a shareholder in the company. For both the reasons, the order passed by the Commissioner (Appeals) was to be upheld.

The assessee shows turnover of direct purchase and sale in the books of account whereas in F & D segment, arbitrage, auctions, etc., only net amounts are accounted while sales was paid on value of transaction. Therefore, reconciling the turnover on the basis of sales is, if not impossible, virtually cumbersome considering the nature of the business, turnover involved and different rates of sales paid for different transactions. On certain transactions in F & AO there is no sales on purchase amounts but only on sale amounts. Therefore, the Assessing Officer’s exercise of asking the assessee to reconcile turnover, may be valid according to law but not practical considering that all the gross amounts are not accounted for in the books of account of the assessee and assessee to a large extent filed Form No. 10DB explaining various turnovers undertaken by the company. The books of account cannot be rejected simply because the assessee failed to reconcile the turnover to the satisfaction of the Assessing Officer. There is no allegation that the assessee was indulging in any transactions outside the books and outside the stock exchange. The books of account were also audited. Scrutiny assessments were completed in all earlier years without rejecting books of account. Considering the explanation given by the assessee and turnover reconciliation placed on record, the Commissioner (Appeals) was correct in rejecting Assessing Officer’s action.