Case Law Details

Case Name : Commissioner Of Income Tax Vs M/s National Travel Services (Delhi High Court)
Appeal Number : ITA No.223 of 2010
Date of Judgement/Order : 11/07/2011
Related Assessment Year :

CIT Vs M/s National Travel Services (Delhi High Court)- The respondent/assessee is a partnership firm consisting of three partners namely Mr. Naresh Goyal, Mr. Surinder Goyal and M/s Jet Enterprises Pvt. Ltd. having profit sharing ratio of 35%, 15% and 50% respectively. The assessee firm had taken a loan of ` 28,52,41,516/- from M/s Jetair Pvt. Ltd. New Delhi. In this company the assessee has invested by subscribing to the equity share numbering 1,43,980 of ` 100 each which constitute 48.18%. However, the shares were purchased in the name of the two partners namely Mr. Naresh Goyal and Mr. Surinder Goyal. Thus, whereas, Mr. Naresh Goyal and Mr. Surinder Goyal are the respective share holders, the assessee is the beneficial share holder. On these facts, in this appeal we are concerned with the first limb [in contradiction to second limb that fell for interpretation in Ankitech (supra)] and are called upon to examine as to whether this first limb of Section 2(22)(e) of the Act has been satisfied. We should point out at the outset that it is an admitted position that all other conditions stipulated in Section 2(22)(e) of the Act are fulfilled. The extent of share holding is also so high that the assessee has indubitably substantial interest in Jetair Pvt. Ltd.

For attracting first limb, the requirement of the provision is that the payment is made by a company “by way of advance or loan to a share holder, being a person who is the beneficial owner of shares”. The question which calls for interpretation is as to whether same is to be paid by way of advance or loan to a share holder who is also the beneficial owner of the shares. To put it otherwise, is it necessary that both the conditions have to be satisfied namely such a person to whom the payment is made is not only a registered share holder but a beneficial share holder as well.

when Section 2 (22) (e) of the Act enacts a deeming provision, it has to be strictly construed. At the same time, it is also trite that such a deeming provision has to be taken to its logical conclusion. If the partnership firm which has purchased the shares is not treated as shareholder merely because the shares were purchased in the name of the partners, that too because of the legal compulsion that shares could not be allotted to the said partnership firm which is a non legal entity, it would be impossible for such a condition to be fulfilled. That is not the purpose of law. The partnership firm is synonym of the partners. As per the Circular issued by the SEBI dated 13th March, 1975 interpreting Section 187 (c) of the Companies Act, relied by the learned counsel for the assessee himself, a partnership firm is not a person capable of being a member‘ within the meaning of Section 47 of the Companies Act. It is further explained that since a partnership firm is not a legal entity by itself but only a compendious way of describing the partners constituting the firm, it is necessary that the names of all the members of the partnership firm should be entered in the Register of Members. Obviously then, with the purchase of shares by the firm in the name of its partners, it is the firm which is to be treated as shareholder for the purposes of Section 2 (22) (3) of the Act.

It would be difficult to accept the contention of Mr. Syali, predicated on the provision of Companies Act as wherever a partnership firm wants to come out of the rigors of Section 2 (22)(e) it can easily do so by not entering the names of all the members of the partnership firm in the Register of Members. In this case itself, it could be seen that Mr. Naresh Goyal holds 44.58% of shareholding in M/s Jet Air (P) Ltd. as a partner of the appellant firm. On the other hand, the said Mr. Narersh Goyal derives 35% of the profit sharing ratio in the assessee firm. In other words, Mr. Naresh Goyal has substantial interest in the assessee firm too. Thus, he is a person who not only has substantial interest but also holds sufficient influence. Since the partnership firm is the beneficial owner and it has to per force purchase the shares in the name of the partners, it is very easy for a person like him to ensure that only the names of partners in whose name shares are purchased is entered in the records of the company and the names of all the partners are not recorded so that provisions of Section 187C   of the Companies Act are not fulfilled. Likewise, it can also be ensured that for the purpose of Section 41 (3) of the Act, the name of the partnership firm is not specifically entered as beneficial owner in the records to the depository to make partnership firm as deemed member of the concern company within the meaning of Section 41 (3) of the Act. Such a situation cannot be countenanced.

We are, therefore, of the opinion that for the purpose of Section 2 (22) (e) of the Act, partnership firm is to be treated as the shareholder and it is not necessary that is has to be “registered shareholder”. We thus answer the questions formulated in favour of the Revenue and against the assessee as a result, this appeal is allowed setting aside the order of the Tribunal and restoring that of the Assessing Officer.

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