TMI Blog2015 (12) TMI 187X X X X Extracts X X X X X X X X Extracts X X X X ..... ly covered in favour of assessee Addition of deemed dividend - CIT(A) deleted the addition - whether the transaction is commercial in nature and even otherwise the lender company is not a shareholder in the assessee company - Held that:- We find that the assessee has taken loan on interest from MTPL and paid interest to the tune of ₹ 9,55,288/- and the lender company's business is that of money lending. MTPL is not shareholder in assessee company although it is a sister concern. Only common feature is that one of the directors Shri M. D. Jindal is holding common shareholding of the assessee company at 50.25% and in MTPL at 64.16%. But admittedly, assessee is not a shareholder in MTPL nor MTPL is a shareholder in assessee company not holding 10% or more shares or voting powers. We find that the assessee has paid interest on the above loans and this is purely a commercial transaction. Once this is the position, the issue is covered by the judgment of Hon'ble Calcutta High Court in the case of Pradip Kr. Malhotra, [2011 (8) TMI 16 - CALCUTTA HIGH COURT] wherein it is held the authorities below erred in law in treating the advance given by the company to the assessee by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding 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 ₹ 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 examined the books of account but no defect was pointed out either in the books of account or in the stock register. He observed that even the assessee has produced complete details and explanation before him but he could not point out any defect in the same. According to CIT(A), the assessee is maintaining complete books of account including stock register and accordingly, he directed the AO to delete the addition of GP. Aggrieved against the order of CIT(A), revenue is in second appeal before Tribunal. 4. We have heard rival submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessing Officer should be not be satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided u/s.145(1) of the Act or accounting standards as notified under Section 145(2) of the Act have not been regularly followed by the Assessee. The AO has to compute income from business accounting to the books of accounts of the Assessee. It is only when the book results are rejected the question of estimation of income arises for consideration. The AO has to specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On 03.08.07 ₹ 23,00,000/- On 06.08.07 ₹ 37,00,000/- On 14.09.07 ₹ 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 ₹ 2,61,42,503/- which consists of General Reserve created out of accumulated profits of ₹ 1,16,50,000/- and profit of this year at ₹ 2,37,503/-. Apart from these shares a Revaluation Reserve of ₹ 1,42,55,000/-. Accordingly, the AO added the loan received from MTPL at ₹ 1.77 cr. as deemed dividend u/s. 2(22)(e) of the Act. Aggrieved, assessee preferred appeal before CIT(A), who first of all, examined that the assessee company is not beneficial owner of shares in that company not holding 10% or more shares or voting powers. It was also explained that no such benefit has been derived by assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. 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 not earned any income/consideration for the loan/advance given to the assessee company. The same view has been taken by Hon'ble Delhi High Court in the case of CIT VS. Rajkumar 318 ITR 462 (Delhi). Thus, keeping in view the observation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ₹ 20,75,000 as a deemed dividend. In view of the above, we find no infirmity in the order of CIT(A) and hence, the same is confirmed. This ground of appeal of revenue is dismissed. 9. As regards to alternative plea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 shareholders or to a concern in which such shareholder has a substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er (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 section 2(22)(e) would not be applicable at all to the case of the assessee-company. (ii) That deemed dividend could be assessed only in the hands of the person, who is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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