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2015 (6) TMI 397 - ITAT DELHI

2015 (6) TMI 397 - ITAT DELHI - TMI - Deemed dividend u/s 2(22)(e) - holding or ownership of voting rights of the shares held by the family - FAA deleted addition - Held that:- AO is of the view that that whether a person has a substantial interest in the company or not, the holding of the family members including the APS is to be seen and clubbed together and as such the share holding receipts of 20% in all the companies or concerns, the provisions of section 2(22)(e) of the I.T. Act gets attra .....

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the Act and "a person who is the beneficial owner of the shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than 20% of the voting power" as appearing in section 2(32) of the Act. Thus it is the ownership of the shareholder alone in the company to which the loan/advance is made by the company, and not his or her relative or family members, which is the determinative factor. Accordingly, inclusion/clubbing of .....

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ovisions of section 2(22)(e) is that closely held companies (i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become tax-able in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholder or to concern i .....

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resumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance.d. First Appellate Authority has deleted the addition in dispute by respectfully following the judgment of the Hon'ble Supreme Court in the case of Nalin Behari Lall Singha (1969 (7) TMI 2 - SUPREME Court) and Bhaumik Colour (P.) Ltd. (2008 (11) TMI 273 - ITAT BOMBAY-E ), which does need any interference on our part, hence, we uphold the impugned order by dismissi .....

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g grounds:- "The DCIT/ACIT Circle-6(1), New Delhi is hereby directed to file an appeal in above mentioned case before the Income Tax Appellate Tribunal, New Delhi on the following grounds(s) of appeal:- 1. Whether in the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition made on account of deemed dividend u/s. 2(22)(e) of the I.T. Act, 1961 for a sum of ₹ 1,56,81,039/- on the ground that Assessing Officer could not prove the third limb of section ignori .....

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in law. 4. That the grounds of appeal are without prejudice to each other. 5. That the appellant craves leave to add, alter, amend or forgo any ground(s) of the appeal raised above at the time of the hearing." 2. The brief facts of the case are that the assessee company was engaged in the business of manufacturing exporting and dealing in all kinds of ayurvedic and herbal preparations. The return of income for the AY 2009-10 was filed on 30.3.2010 declaring an income of ₹ 3,76,95,433/ .....

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d with the aforesaid impugned order, Revenue is in appeal before the Tribunal. 5. Ld. DR relied upon the order of the Assessing Officer and reiterated the contentions raised by the Revenue in the grounds of appeal. 6. On the contrary, Ld. Counsel of the assessee relied upon the order of the Ld. CIT(A) and submitted that the impugned order of the Ld. CIT(A) may be upheld. 7. We have heard both the parties and perused the orders passed by the Revenue Authorities alongwith documentary evidence file .....

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ccruing in the case of the assessee who is substantial share holder of the assessee company and thus provisions of section 2(22)(e) is attracted in the case of the assessee. The Ld. CIT(A) has decided the issue in dispute in the appeal filed by the Assessee in his impugned order. For the sake of convenience, the relevant portion of the Ld. CIT(A)'s order from paras 3 to 13 at pages 2 to 11 is reproduced below:- '3.1 The appellant company was engaged in the business of manufacturing expor .....

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ions: 3.3. Aggrieved with the above, the appellant filed the present appeal. On behalf of the appellant, Sh. Deepak Jain, CA appeared and made written and oral submissions. The only issue involved is the addition under section 2(22)(e) for the sums aggregating ₹ 1,56,81,039/- paid as loan/advance by the appellant company to as many as 4 person (3 companies and 1 charitable society). S. No. Company's name Opening balance Paid during the year Received during the year Closing balance Natu .....

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ny is with the family members of Shri Anand Prakash Srivastava, therefore, the AO held that the loan or advance so made, are liable to be treated as a benefit accruing to Sh. Anand Prakash Srivastava who is substantial share holder of the appellant company and thus provisions of section 2(22)(e) are attracted in the present case. 5. The provision of section 2(22)(e) reads as under- 2(22) "dividend" includes (a) to (d)....... (e) any payment by a company not being a company in which the .....

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rticipate in profits) holding not less than ten 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 any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; 5.1 The three limbs of section 2(22(e) are as follows: Any payment .....

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) 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). Third limb:- (c) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; 5.2 The provisions of section 2(22)(e) create a fiction bringing in amount paid otherwise than as dividend, into the net of d .....

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s and advances have been given to him as per clause (a), • or to any concern in which Shri. Anand Prakash Srivastava is a member or a partner and in which he has a substantial interest as per clause (b), • any person on behalf of or for the individual benefit of Shri. Anand Prakash Srivastava (c) 6.2 Loans or advance have not been made by the appellant company to Shri Anand Prakash Shrivastava therefore, condition No. (a) is not attracted in the present case. 6.3 The shareholding patte .....

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tava 1,44,565 14,45,650 7.23% (vi) Amrita Srivastava 1,44,565 14,45,650 7.23% (vii) Richa Srivastava 1,44,565 14,45,650 7.23% (viii) Ajay Srivastava 1,44,565 14,45,650 7.23% (ix) Sanjay Srivastava 1,28,500 12,85,000 6.43% Others 1,44,895 14,48,950 7.24% Total 20,00,000 2,00,00,000 100.00% B. Maharishi Vedic Construction Corporation (P) Ltd. Sl. No. Name of the Shareholder No. of equity share of ₹ 10 each Paid-up share capital % age of holding (i) Maharishi Global Construction Ltd. * 2,95,9 .....

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% (iii) Ram Srivastava 42,900 4,29,000 9.911% (iv) Nishi Srivastava 49,500 4,95,000 11.436% (v) Richa Srivastava 42,900 4,29,000 9.911% (vi) Pragya Srivastava 42,900 4,29,000 9.911 % (vii) Others 1,92,014 19,20,140 44.358% Total 4,32,860 43,28,600 100.000% Further, as regards SRM Foundation of India, it is a charitable society duly registered under the Societies Registration Act and also with the Director of Income-tax (Exemption) under section 12A of the Act, wherein family members of Shri. Ana .....

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ividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power;" 6.5 When the aforesaid situation is applied to the facts of the present case, it is evident that Shri. Anand Prakash Srivastava (who holds 99.9% shares in the appellant company) holds following shareholding/voting power in the three companies and one society in relation to which section 2(22)(e) has been invoked: Sl. No. Name of the company/concern % of Voting Righ .....

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hareholding exceeds 20% in all the companies or concerns, therefore, provisions of section 2(22)(e) gets attracted. The percentage of shareholding 1 voting power/share in the income after clubbing of the share of the family members in the four companies/concern is as under: SI. No. Name of the company/concern % of share holding/Voting Rights/income (i) Global Diamonds (P) Ltd Above 20 % (ii) Maharishi Vedic Construction Corpn. (P) Ltd. .003% (iii) Golden Glades Ltd. Above 20% (iv) SRM Foundation .....

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reholder is a member or a partner and in which he has a substantial interest" as appearing in section 2(22)(e) of the Act and "a person who is the beneficial owner of the shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than 20% of the voting power" as appearing in section 2(32) of the Act. Thus it is the ownership of the shareholder alone in the company to which the loan/advance is made by t .....

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over fiction. Further, that income tax is a personal tax and is levied on a person in respect of his total income i. e. the income which has arisen, accrued or received or deemed to have arisen accrued or received by him and the income is being computed as per provisions of the Act. Wife, son, daughter and other family members of an assessee are different assessees, independent and distinct persons and entities under the Act and unless the lw prescribes the transactions made by them to be clubb .....

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as envisaged by the provisions of section 2(22)(e) On a perusal of assessment order the AO has nowhere demonstrated or established any nexus between the loans granted by the appellant company vis-à-vis flow of funds to Sh. Anand Prakash Srivastava (shareholder of the appellant company). Therefore, the finding of the Ld. AO in this regard is merely based on assumption and presumption only and deserves to be quashed being based on no evidence ......... Whereas in the present case, there is .....

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e of dividend from being more than only a distribution of profits to cover certain other types disbursements such as loans paid, etc. ........ The new category of payment which was considered as dividend introduced by the Finance Act, 1987, with effect from April 1, 1988, by the second limb of section 2(22)(e) is payment" to any concern in which such shareholder is a member or a partner and in which he has a substantial interest". It is this category of payment with which we are concer .....

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is because of the expression 'such shareholder' found in the relevant provision. This expression only refers to the shareholder referred to in the earlier part of section 2(22)(e), viz., a registered and a beneficial holder of shares holding 10% voting power (c) The very same person referred to in (b) above must also be a member or a partner in the concern holding substantial interest in the concern, viz., when the concern is not a company, he must at any time during the previous year, .....

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) is that closely held companies (i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become tax-able in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholder or to concern in which such shareholders h .....

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advances would ultimately be made available to the shareholders of the company giving the loan or advance. ....... The Apex Court while considering what can come within the artificial definition of dividend under section 2(22) in the case of CIT v. Nalin Behari Lall Singha [1969] 74 ITR 849 (SC) described the scope of the definition of dividend thus "The definition is, it is true, an inclusive definition and a receipt by a shareholder which does not fall within the definition may possibly .....

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r but not beneficial shareholder then provisions of section 2(22)(e) do not apply and similarly if a person is a beneficial shareholder but not a registered shareholder then also provisions of section 2(22)(e) do not apply. The Tribunal thus took a very strict interpretation and went completely by the letter of the provision. As this Section creates a fiction bringing in amounts paid otherwise than as dividends, into the net of dividends, it does not allow for any further interpretation or leewa .....

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determining the question as to whether a person is substantially interested in the company or not. The words are "shareholder, being a person who has a substantial interest in the company" as appearing in section 2 (22)(e) of the Act and "a person who is the beneficial owner of shares. not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power" as appearing in sec .....

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erent assessee, independent and distinct persons and entitles under the Act and unless the law prescribes the transactions to be looked into together while computing the income of the assessee, no cognizance of the shareholdings or other transactions thereof could be taken into consideration while computing the income of the assessee. No provision has been brought to my notice which authorises the revenue authorities to consider the share holding or ownership of the husband or son as the holding .....

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e case at hand that the aforesaid condition No. (b) given in para 5.2 above is not attracted. 11. The AO has not brought out any facts to show that the third limb (c) given in para 5.2 of Section is attracted. Loans/advances given by the appellant company cannot be termed as having been made for an on behalf of or for the individual benefit of Sh. Anand Prakash Srivastava as envisaged by the provisions of section 2(22)(e) unless some transactions to prove this are brought out. The individual ben .....

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f ₹ 1,56,81,039/- on account of deem dividend u/s. 2(22)(e) is deleted.' 7.1 After going through the impugned order passed by the Ld. CIT(A), we are of the view that the AO is of the view that that whether a person has a substantial interest in the company or not, the holding of the family members including the APS is to be seen and clubbed together and as such the share holding receipts of 20% in all the companies or concerns, the provisions of section 2(22)(e) of the I.T. Act gets at .....

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n 2(22)(e) of the Act and "a person who is the beneficial owner of the shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than 20% of the voting power" as appearing in section 2(32) of the Act. Thus it is the ownership of the shareholder alone in the company to which the loan/advance is made by the company, and not his or her relative or family members, which is the determinative factor. Accordingly .....

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has rightly referred the Special Bench of the ITAT in the case of Asstt. CIT v. Bhaumik Colour (P.) Ltd [2009] 313 ITR (A.T.) 0146 (Mum) (SB) has taken a very strict interpretation of Section 2(22)(e) and has stated as under :- "Section 2(22) of the Act artificially extends the scope of dividend from being more than only a distribution of profits to cover certain other types disbursements such as loans paid, etc. ...... The new category of payment which was considered as dividend introduce .....

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pany. (c) A person must be a shareholder of the company being a registered holder and beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power. This is because of the expression 'such shareholder' found in the relevant provision. This expression only refers to the shareholder referred to in the earlier part of section 2(22)(e), viz., a registered and .....

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ether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power. (d) If the above conditions are satisfied then the payment by the company to the concern will be dividend." 7.4 We find that the intention behind enacting the provisions of section 2(22)(e) is that closely held companies (i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profi .....

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d as dividend. The intention behind the provisions of section 2(22)(e) is to tax dividend in the hands of shareholder. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. 7.5 We note that the Hon'ble Apex Court while considering what can come within .....

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Smt. Gunvanti R. Mehta v. ITO [1993] 45 ITD 382 (Bom.) wherein the Tribunal commented on the issue the shares held by the family can be taken into consideration in determining the "substantial interest in the company" held as under:- 'I find that there is nothing in section 2(22)(e) of the Act or section 2(32) of the Act to suggest that the holding or ownership of voting rights of the shares held by the family can be taken into consideration for determining the question as to whet .....

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ership of the shareholder alone, to whom the loan/advance is made by the company, and not his or her relative or family member which is the determinative factor. Income-tax is a personal tax and is levied on a person in respect of his total income, i.e., the income which has arisen, accrued or received or deemed to have arisen, accrued or received by him and the amount is the computation as per the provisions of the Act Husband and son of the assessee are different assessee, independent and dist .....

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