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TMI Blog2015 (12) TMI 187X X X X Extracts X X X X X X X X Extracts X X X X ..... own by the assessee without rejecting the books of accounts." 3. Briefly stated facts are that the assessee is a dealer in Maruti vehicles, trading of spare parts, dealing in shares and securities and property business. The AO during the course of assessment proceedings on examination of trading account of spare parts and accessories found that it has suffered substantial loss i.e. at Rs. 6,56,332/- and in term of percentage 61.63% as against profit in the immediate preceding year at Rs. 49,30,238/- and as against profit rate of 6.5%. According to AO, the assessee is not maintaining any stock register of spare parts and hence, quantitative analysis of the stock of spare parts is not possible. He also noted the branch wise trading account and noticed that the assessee earned profit in its headquarters and Darga Road Branch @ 9% and 7% respectively but suffered loss in Taratola Branch @ 48%. By analyzing all the aspects, the AO applied GP rate as declared in the immediate preceding year at 6.46% and determined GP at Rs. 26,62,416/- and added to the total income of the assessee. Aggrieved, assessee preferred appeal before CIT(A), who deleted the addition by stating that the AO has ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the rival submissions. The provisions of Sec.145 of the Act, reads as follows: "145. Method of accounting.-(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time [income computation and disclosure standards] to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) [has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2),] the Assessing Officer may make an assessment in the manner provided in section 144." The AO did not reject the book results before resorting to an estimation of income. For rejecting the book results, the provisions of Sec.145(3) of the Act requires that the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in deleting the addition of Rs. 1,16,50,000/- on account of deemed dividend u/s. 2(22)(e) of the I. T. Act, 1961 on the ground that the lender company has given loan for the consideration of interest @ 12% p.a." 7. Briefly stated facts are that the AO during the course of assessment proceedings noted that the assessee has received a loan of Rs. 1.77 cr. from Machino Transport Pvt. Ltd. (MTPL) on the following dates: "On 11.04.07 Rs. 71,00,000/- On 03.08.07 Rs. 23,00,000/- On 06.08.07 Rs. 37,00,000/- On 14.09.07 Rs. 46,00,000/- Rs.1,77,00,000/-" According to AO, Shri M. D. Jindal is holding 38,500 shares out of total issued shares of 60,000 i.e. 65.16% of MTPL as on 31.03.2007 and he is also holding shares of assessee company as on 31.03.2008 for 50.25%. According to AO, MTPL has reserve and surplus of Rs. 2,61,42,503/- which consists of General Reserve created out of accumulated profits of Rs. 1,16,50,000/- and profit of this year at Rs. 2,37,503/-. Apart from these shares a Revaluation Reserve of Rs. 1,42,55,000/-. Accordingly, the AO added the loan received from MTPL at Rs. 1.77 cr. as deemed dividend u/s. 2(22)(e) of the Act. Aggrieved, assessee preferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Pradip Kr. Malohatra reported in 338 ITR 538 (Kol.). In this case the Hon'ble Kolkata High Court has observed "after hearing the Ld. Council for the parties and after going through the aforesaid provisions of the Act. We are of the opinion that the fresh 'by of advance of loan' appearing in sub-sec. (e) .must be construed to mean those advances or loans which a share holder enjoys for simply on account of being 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 participates in profits) holding not less than 10% of the voting power; but if such loan or advance is given to such share holders as a consequence of any further consideration which is beneficial to the company received from such a shareholder, in such case such advance or loan cannot be said to a deemed dividend within the meaning of the Act." I have considered the find of the A.O. on this issue and I have also considered the submission filed by the AR. It is clear that the lender company has given loan for the consideration of interest @ 12% p.a. Therefore, it cannot be said that the lender company has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the company by such shareholder 11. In the case before us, the assessee permitted his property to be mortgaged to the bank for enabling the company to take the benefit of loan and in spite of request of the assessee, the company is unable to release the property from the mortgage. In such a situation, for retaining the benefit of loan availed of from Vijaya Bank if decision is taken to give advance to the assessee such decision is not to give gratuitous advance to its shareholder but to protect the business interest of the company. 12. The view we propose to take finds support from the two decisions, one of the Bombay High Court and the other of the Delhi High Court relied upon by Mr. Khaitan as indicated earlier. 13. We, therefore, find that the authorities below erred in law in treating the advance given by the company to the assessee by way of compensation to the assessee for keeping his property as mortgage on behalf of the company to reap the benefit of loan as deemed dividend within the meaning of section 2(22)(e) of the Act. 14. We, consequently, set aside the order of the Tribunal below by directing the Assessing Officer not to treat the advance of Rs. 20,75,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w 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". The expression "such shareholder" in the provision refers to the shareholder referred to in the earlier part of section 2(22)(e) namely, a registered and a beneficial holder of shares holding 10 per cent. voting power. The very same person must also be a member or a partner in the concern holding substantial interest in the concern. The provisions of section 2(22)(e) as amended by the Finance Act, 1987, with effect from April 1, 1988, do not say in whose hands the dividend has to be brought to tax, whether in the hands of the "concern" or the "shareholder". The intention behind enacting the provisions of section 2(22)(e) arose from that fact that closely held companies which are controlled by a group of members, would not distribute such profit as dividend because the dividend income would become taxable in the hands of the shareholders. Instead, companies distribute them as loans or advances to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e invoked. The Assessing Officer did not agree and taxed the sum of Rs. 9 lakhs in the hands of the assessee-company as deemed dividend. On appeal by the assessee the Commissioner (Appeals) deleted the addition. The intervener was a firm, consisting of four partners, which had various transactions of receipts and payments of money with a company in which these four partners held shares in the same percentage as their profit sharing ratio in the firm. The Assessing Officer applied the provisions of section 2(22)(e) in respect of the net outstanding from the assessee-firm to the company and brought it to tax in the hands of the firm. The order of the Assessing Officer was reversed by the Commissioner (Appeals). On appeal before the Tribunal in view of a conflict of opinion among Benches of the Tribunal, the matter was referred to a Special Bench: Held, dismissing the appeal (i) that the three trustees of the trust held shares in UPPL and the assessee-company was only as a legal and registered owner for and on behalf of five beneficiaries of the trust who were different individuals. The three trustees were, therefore, not beneficial owners of the shares. Therefore, the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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