TMI Blog2010 (4) TMI 871X X X X Extracts X X X X X X X X Extracts X X X X ..... THAT:- As per the facts on record the assessee-company is having no shareholding in the other group companies. It is well-settled principle that dividend income is only received by the shareholder. See BHAUMIK COLOUR (P) LIMITED. [ 2008 (11) TMI 273 - ITAT BOMBAY-E] The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word dividend is extended to loans and advance to a shareholder or to a concern in which a shareholder is substantially interested deeming them as dividend in the hands of a shareholder the ordinary and natural meaning of the word dividend is altered. To this extent the definition of the term dividend can be said to advance to a non-shareholder the ordinary and natural meaning of the word dividend is taken away. In the light of the intention behind the provisions of section 2(22)( e ) to extend the legal fiction to a case of loan or advance to a non-shareholder cannot be taxed as deemed dividend in the hands of a non-shareholder. Under these circumstances, when payment is made to a non-shareholder, it is impossible for the payer comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08 raised common grounds as follows : "1.The CIT(A) erred both on facts and in law insofar as it is prejudicial to the assessee. 2.The Assessing Officer erred in passing orders under sections 201(1) and 201(1A) beyond the period of two years from the end of the assessment year. 3.The CIT(A) erred in holding that the provisions of section 194 is applicable to the amounts advanced to Marc Manufacturers (P.) Ltd. 4.The CIT(A) erred in holding that advances made to MMPL comes within the purview of provisions of section 2(22)( e ). 5.The CIT(A) erred in holding that the repayments by MMPL cannot be considered while computing deemed dividend under the provisions of section 2(22)( e ). 6.The CIT(A) erred in holding that deferred tax also should be considered while considering the reserves and surpluses for the purposes of working out deemed dividend without appreciating the fact that deferred tax is a provision against future liability and cannot be considered as accumulated profit. 7.The CIT(A) erred in holding that amounts paid against supplies also has to be considered for dividend without appreciating the fact that such amounts are considered by MMPL as trading receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reserves to hold the amount advanced as deemed dividend under section 2(22). 5.The CIT(A) failed to appreciate the fact that dividend can be taxed only in the hands of a shareholder and thereby erred in confirming the action of the Assessing Officer assessing deemed dividend in the hands of the assessee though it is not a shareholder of the company which advanced the amounts." 5. Brief facts of the case in assessee s appeals in ITA Nos. 1162, 1163 and 1166/Hyd./2008 and in Revenue appeals in ITA Nos. 1002 to 1004/Hyd./2008 are that a survey under section 133A was conducted in the case of the assessee during the survey it was noticed that the assessee is a closely held company reporting substantial profits. It was also noticed that the company had transferred huge amounts as loans to a sister concern, named Marc Manufacturers (P.) Ltd. (MMPL) year after years. It was also found that majority of the shareholders in both the companies are common. After verifying the books the Assessing Officer found that the following amounts had been transferred by the assessee-company to MMPL in the financial years 2002-03 to 2004-05 relevant to assessment years 2003-04 to 2005-06. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee before the Assessing Officer : ( a )M/s. Marc Manufacturers (P.) Ltd. is not a shareholder of the assessee-company and as such the provisions of section 2(22)( e ) would not apply. ( b )They were under bona fide impression that the amount given to MMPL is not income in the hands of MMPL and hence there was no obligation on its part to deduct tax at source from such payments. ( c )Provision of section 194 will not attract since the payee i.e., MMPL is not a shareholder in the assessee-company. ( d )On the date of advance the loan, there are no accumulated profits. ( e )The amounts in question are deposits and not loans and hence, the provisions of section 2(22)( e ) will not be applicable. 5.4 However, the explanation submitted by the assessee was not accepted by the Assessing Officer. As regards the first contention, the Assessing Officer held that after amendment to section 2(22)( e ) with effect from 1-4-1988, the scope of shareholder has been enlarged and the argument of the assessee is no more valid. The Assessing Officer referred to the decision of ITAT, Hyderabad in the case of Hyderabad Chemical Products v. ITO [2000] 72 ITD 323 , wherein it was he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a self serving statement not supporting by the facts on record since the books of account as also the narration in the ledger account clearly indicate the amount as loan. Further, the Balance Sheet, the outstanding amount has been shown under the head loans and advances . Similarly, in the Balance Sheet of MMPL (the payee), the amount was shown under the head unsecured loans . The Assessing Officer referred to the note to the Auditor s Report in the case of the payee company, wherein, it was stated that the company did not accept any deposits. On the other hand there was clear reference in the Audit Report for financial years 2002-03, 2003-04, and 2004-05 of the assessee-company that it had given unsecured loan to companies under the same management. Similar reference was also there in the Auditor s Note to the audited accounts of the payee company (MMPL). The Assessing Officer also observed that section 2(22)( e ) refers not only to loan and advance but also to any payment and hence, the assessee s case clearly fits into the provision of section 2(22)( e ) of the Act. 5.8 Thus, after considering all the objections raised by the assessee the Assessing Officer came to the conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. The assessee contended before the CIT(A) that repayment amount should be reduced while calculating the deemed dividend under section 2(22)( e ). The assessee also contended before CIT(A) that the Assessing Officer wrongly arrived accumulated profit by considering depreciation as provided in the books of account without considering depreciation as per Income-tax Act. There is also dispute regarding the inclusion of deferred tax reserve within the reserve surplus which is considered as part of accumulated profit. Further, the assessee contended before CIT(A) in view of the Explanation 2 below clause ( e ) of sub-section (22) of section 2, the day-to-day accumulated profit to be considered. The CIT(A) rejected this ground placing reliance on various orders of Tribunals as well as Bombay High Court by holding that even on the date of credit entries for the off loading amount , the balance in the account of MMPL (the payee) were showing debit balance thus the payments made by the assessee to MMPL are still to be treated as advance within the ambit of section 2(22)( e ) of the Income-tax Act. The assessee is in appeal before us on the issue relating to invoking the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax as deemed dividend income in the assessee s case under the head income from other sources for the year under consideration. The assessee s explanation was not accepted by the Assessing Officer. From the assessment records, it is seen that the assessee has sent a detailed reply dated 20-12-2006. From the facts, it is seen that M/s Marc Manufacturers is not a shareholder in MTAR Technologies (P.) Ltd. It is only two directors of the assessee are the shareholders of MTAR Technologies (P.) Ltd. For better appreciation, the relevant provisions of section 2(22)( e ) are extracted as under : Any payment by a company, not being a company in which public are substantially interested, of any sum whether as representing a part of the assets of the company or otherwise made after the 31st of May, 1987 by way of advance or loan to a shareholder, being a person who is the beneficial owner whether with or without a right to participate in profits, holding not less than 10 per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the shareholder only and not in the hands of the payee, viz., non-shareholder (concern). Section 5(1)( a ) contemplates that the receipt or deemed receipt should be in the nature of income. Therefore, the deeming fiction can be adopted only in the hands of the shareholders and not the non-shareholder viz., the concern. 36. The definition of Dividend under section 2(22)( e ) of the Act is an inclusive definition. Such inclusive definition enlarges the meaning of the term dividend according to its ordinary and natural meaning to include even a loan or advance. Any loan or advance cannot be dividend according to its ordinary and natural meaning. The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word dividend is extended to loans and advance to a shareholder or to a concern in which a shareholder is substantially interested deeming them as dividend in the hands of a shareholder the ordinary and natural meaning of the word dividend is altered. To this extent the definition of the term dividend can be said to advance to a non-shareholder th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnologies (P.) Ltd. unless the assessee is a shareholder in the company making the payment, the amount received shall not be treated as income within the meaning of section 2(22)( e ) of the Income-tax Act. The assessee submits that the amended provisions of section 2(22)( e ) are explained in detail by the Circular No. 495 dated 22-9-1987 issued by the CBDT reported in 168 ITR (Statutes) 87. In the said circular the intention of introducing clause ( e ) of sub-section (22) of section 2 is mentioned. An extract of the said circular is given below : With the deletion of sections 104 to 109 there was a likelihood of closely held companies not distributing their profits to shareholders by way of dividends but by way of loans or advances so that these are not taxed in the hands of the shareholders. To forestall this manipulation, sub-clause ( e ), clause (22) of section 2 has been suitably amended. 5. It can be seen from the circular that the provisions of amended section 2(22)( e ) are to be applied only to the payments made to the shareholders and not to any other person or concern other than shareholders. The Allahabad High Court in the case of CIT v. H.K. Mittal 219 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the tax is to be deducted at source from a dividend or deemed dividend and the consequential effect of giving effect to such deduction of tax at source, etc., reference was made only to the payments to the shareholder. This would indicate clearly the clause ( e ) would apply only in case of payments to the shareholder and not to others. 7. Besides the above explanation, the assessee also submits that the provisions of Income-tax Act for deduction of tax at source in respect of the dividend are contained in section 194 which reads as under : Dividends : The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall before making any payment in cash or before issuing any cheque or warrant in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause ( a ) or sub-clause ( b ) or sub-clause ( c ) or sub-clause ( d ) or sub-clause ( e ) of clause (22) of section 2, deduct from the amount of such dividend, income-tax at the rates in forc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ividend because if so distributed the dividend income would become taxable income in the hands of the shareholders. Instead of distributing accumulated profit as dividend, company distribute them as loans or advances to shareholders or to concern in which such share-holders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholders. In such an event, by the deeming provisions, such payment by the company is treated as dividend. The intention behind the provisions of section 2(22)( e ) is to tax dividend in the hands of shareholders. The deeming provision as it applies in the case of loans or advances by a company to a concern in which its shareholders has substantial interest is based on the presumptions that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advances. The intention of the Legislature is therefore, to tax dividend only in the hands of the shareholder and not in the hands of the concern. The basis of bringing in the amendment to section 2(22)( e ) by the Finance Act, 1987, with effect from 1-4-1988 is to ensure that persons who control the affairs of a comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of section 2(22)( e ) of the Income-tax Act or not. Therefore, in this view of the matter, law does not expect the payer company to deduct TDS when payment is made to a non-shareholder. This is the reason, the law expressly provides for TDS requirements only when payment is made to shareholder. Thus, section 194 requires TDS only when payment is made to the shareholder. Payments to a shareholder will cover both as dividends normal divided as well as deemed dividend. Otherwise also, deemed dividend will be taxed in the hands of the shareholders and not in the hands of non-shareholders payee. Therefore, section 194 does not require TDS when payment is made to non-shareholders. Also, under section 206 of the Companies Act, 1956 the dividend can be paid a registered shareholder only. Therefore, section 194 of the Act is synchronized with the requirements of Companies Act, 1956 containing sections 150 and 206 of the Companies Act. Accordingly, in our opinion, the impugned amount cannot be as deemed income in the hands of recipient being so the provisions of section 194 is not applicable. Consequently, the provisions of sections 201 and 201(1A) cannot be applied. 11. The assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
