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2016 (1) TMI 1078 - ITAT AHMEDABAD

2016 (1) TMI 1078 - ITAT AHMEDABAD - TMI - Disallowance out of interest expenses @ 3% u/s 40A(2)(b) - Held that:- The decision of Hon’ble Gujarat High Court in the case of Principal CIT vs. Gujarat Gas financial Services Ltd. (2015 (7) TMI 743 - GUJARAT HIGH COURT) wherein it has been held that in a situation when the Assessing Officer found that assessee was using some space of the parent company and, therefore, initiated proceedings u/s 40A(2)(b) and deducted and remitted rent of space from se .....

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Mahavir Rolling Mills were normal business transactions and did not reflect any intention of the assessee to will-fully evade tax by paying higher rate of interest and therefore, we delete the addition made by Assessing Officer - Decided in favour of assessee

Deemed dividend u/s. 2(22)(e) - Held that:- As the assessee company is not a share holder in Mahavir Rolling Mills Pvt. Ltd., therefore, no addition could be made u/s 2(22)(e) of the Act, as deemed dividend and accordingly, we f .....

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appeal No.CIT(A)-VIII/ACR.4/732/09-10. Assessment was framed u/s 143(3) of the Income-tax Act, 1961 (in short the Act) vide order dated 17/12/2009 for Asst. Year 2007-08. 2. First we take up assessee s appeal in ITA No.1942/Ahd/2011 for Assessment Year 2007-08. Following grounds have been raised in this appeal :- 1. The ld. CIT(A) has erred in confirming the disallowance out of interest expenses @ 3% u/s 40A(2)(b) of the I.T. Act., 1961. 2. The appellant craves leave to add, alter, amend or modi .....

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n account of excess interest claimed to be paid to a party covered u/s 40A(2)(b) of the Act and addition of ₹ 85,21,606/- on account of deemed dividend income and accordingly assessed the income of the assessee at ₹ 1,46,35,638/-. 4. Aggrieved, assessee went in appeal before the ld. CIT(A) who sustained the addition made u/s 40A(2)(b) and deleted the addition made on account of deemed dividend. Assessee is in appeal before the Tribunal against the action of ld. CIT(A) in confirming t .....

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. K. K. Bansal is a major share holder in Mahavir Rolling Mills P. Ltd. and interest @ 12% has been charged from Mahavir Rolling Mills Pvt. Ltd. Due to this very reason that assessee is paying interest 15% to its director and charging 12% interest from a sister concern having the same director as well as major share holder, thereby charging excess interest @ 3% and therefore made disallowance of excess interest paid at ₹ 14,02,522/-. 6. The ld. AR further submitted that Assessing Officer h .....

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1,275/-; which means that the unsecured loan taken has substantially reduced. Similarly, in case of transaction between the assessee and Mahavir Rolling Mills there was no opening balance and regular transactions of fund outflow and inflow in between the two companies have taken place and over all during the year total of credit entries is ₹ 6,69,37,343/- and total of debit entries excluding interest paid is ₹ 65,05,700/- and the account has been squared up at the end of the year. Th .....

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that assessee s object was not to evade any tax by such arrangement. To further strengthen his argument ld. AR has relied on the decision of Hon ble Jurisdictional High Court in the case of Principal CIT-2 vs. Gujarat Gas Financial Services Ltd. (2015 60 taxmann.com 483 (Gujarat) (copy of decision is placed on record). 8. The ld. DR relied on the orders of lower authorities. 9. We have heard the rival contentions and perused the material on record. The basic reason due to which Assessing Officer .....

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vir Rolling Mills Pvt. Ltd. and charged 12% interest and thereby claimed excess interest by 3% and made addition of this excess 3% interest being made to a relative under the provisions of sec.40A(2)(b) of the Act and made addition of ₹ 14,02,522/-. 10. However, considering the submissions of ld. AR and examining the records as well as ledger a/c of Mr. K. K. Bansal and Mahavir Rolling Mills P. Ltd. in the books of account of assessee, we find sufficient force in the submissions of ld. AR. .....

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his extent. Similarly, while going through the ledger a/c of Mahavir Rolling Mills where there is no opening balance and there have been regular transactions of funds received and paid (almost every month) and coming to the end of the year the a/c has been squared up and this shows that there were regular flow of funds for business expediency with its sister concern. In the case of any assessee having sister concern and common director such type of funds movement are quite natural and are made f .....

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Gujarat Gas financial Services Ltd. (supra) supports the view discussed above wherein it has been held that in a situation when the Assessing Officer found that assessee was using some space of the parent company and, therefore, initiated proceedings u/s 40A(2)(b) and deducted and remitted rent of space from services charges it was observed that as assessee company and parent company both were taxed at marginal rate and therefore it cannot be said that service charges paid to parent company are .....

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ss transactions and did not reflect any intention of the assessee to will-fully evade tax by paying higher rate of interest and therefore, we delete the addition made by Assessing Officer and allow the ground of appeal of assessee. 12. Ground No.2 is of general nature, which requires no adjudication. 13. Now we take up cross appeal of Revenue in ITA ITA No.2191/Ahd/2011 for Asst. Year 2007-08 wherein following grounds have been taken up :- 1. The ld. CIT(A) has erred in law and on facts in delet .....

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f the Assessing Officer may be restored to the above extent. 14. The only issue to be decided in this appeal is relating to deletion of addition of ₹ 85,21,606/- on account of deemed dividend u/s 2(22)(e) of the Act by ld. CIT(A). 15. Briefly stated facts are that during the assessment proceedings the Assessing Officer observed that during the year under appeal the assessee company received advance from Mahavir Rolling Mills Pvt. Ltd. amounting to ₹ 6,69,37,343/- and the maximum outs .....

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calculating the increase in accumulated profits of Mahavir Rolling Mills Pvt. Ltd. in comparison to last year. The assessee went in appeal before the CIT(A) who deleted the addition by relying on the decision of the Tribunal in the assessee s own case for Asst. Year 2005-06 in ITA No.2349/Ahd/2008 vide order dated 10/12/2010. 16. Aggrieved the Revenue is now in appeal before the Tribunal. 17. Ld. DR relied on the order of Assessing Officer whereas the ld. AR supported the order of CIT(A). 18. We .....

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order by making addition of ₹ 85,21,606/- by taxing it in the hands of the assessee as a deemed dividend without appreciating the fact that during the year assessee company has not received the advances only but has regularly given funds to Mahavir Rolling Mills Pvt. Ltd. and as discussed in the appeal of assessee that these transactions are being carried out regularly for business expediency. Further as referred by ld. AR that this issue of deemed dividend u/s 2(22)(e) has been dealt by t .....

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AO further observed that as per the books of account, M/s. MRPL has advanced huge sum to M/s MRPL i.e. the assessee-company and MIPL have shown reserves and surplus at ₹ 1,01,54,414/-. The AO therefore observed that the loans and advances made by MIPL to MRML is liable to taxed as deemed dividend. In response to the show cause notice asking the assessee to explain why the amount should not be treated as deemed dividend u/s.2(22)(e), the assessee filed written submissions dated 22-12-2007 w .....

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We find from the assessment order that he has not dealt with the issue of the assessee that the assessee-company is not holding even a single share of MIPL and now before us the assessee has demonstrated that no shareholding is held by the assesseecompany of MIPL. But even otherwise, this issue is squarely covered by the decision of Special Bench of ITAT Mumbai in the case of ACIT v. Bhaumik Colour (P) Ltd. (2009) 118 ITD 1 (Mum)(SB), wherein the Hon ble Special Bench has held as under:- 33. We .....

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by way of loan/advance falls within the ambit of section 2(22)(e), then, it has to be treated as dividend even though such payment in the ordinary circumstances may not be considered as dividend. At this point of time, the role of section 2(22)(e) ends. It nowhere provides as to who is to be taxed in inspect of such income. It is to be borne in mind that the tax can only be assessed in the hands of right person as held by the apex court in the case of ITO v. Ch. Atchalah (1996) 218 ITR 239, at p .....

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that deemed dividend would be taxed in the hands of a concern (nonshareholder) also if the conditions mentioned in the section are satisfied. 34. We are of the view that the provisions of section 2(22)(e) do not spell out as to whether the income has to be taxed din the hands of the share-holder or the concern (non-shareholder). The provisions are ambiguous. IT is therefore necessary to examine the intention behind enacting the provisions of section 2(22)(e) of the Act. 35. The intention behind .....

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to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. 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 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 b .....

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irm can have the payment made to a concern from the company and the person who can control the affairs of the concern can draw the same from the concern instead of the company directly making payment to the shareholder as dividend. The source of power to control the affairs of the company and the concern is the basis on which these provisions have been made. It is therefore proper to construe those provisions as contemplating a charge to tax in the hands of the shareholder and not in the hands o .....

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viz., the concern. 37. 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 .....

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In the light of the intention behind the provisions of section 2(22)(e) and in the absence of indication in section 2 (22)(e) to extended the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a non-shareholder cannot be taxed as deemed dividend in the hands of a nonshareholder. 38. The basic characteristic of dividend as held by the apex court in the case of Kantilal Manilal v. CIT [1961] 41 ITR 275 is a share of profits of the compa .....

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etc. (the first ingredient mentioned above). It does not however alter the second component of its natural meaning, viz., paid to its shareholder. In other words all that section 2(22) seeks to do is to expand the various types payments that may be regarded as dividend. 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 divid .....

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the year in which dividend has to be taxed. It is therefore clear that the shareholder alone can, if at all, be subjected to tax for having earned dividend. 39. In the decision of the Tribunal in the case of Nikko Technologies Ltd. (supra) reliance has been placed on Circular No.495, dated September 22,1987 ([1987] 1568 ITR (St.) 87), which states as follows (page 91): Further, deemed dividend would be taxed in the hands of a concern where all the following conditions are satisfied…. We .....

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of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e) to the extent to which it is so set off. In the event of the payment of loan or advance by a company to a concern being treated as dividend and taxed in the hands of the concern then, the benefit of set off cannot be allowed to the concern, because the concern can never receive dividend from the company which is only paid to the shareholder, who has substantial interest in the concern. The above provi .....

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rred to the Special Bench are answered as follows: On the first question: Deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. On the second question: The expression shareholder referred to in section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of section 2(22) .....

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ction 2(22)(e) of the Act the following four conditions are that since qua non : (a) the assessee should be a shareholder of the company; (b) the company should be a closely held company in which the public are not substantially interested; (c) there must be payment by way of advance or loan to a shareholder or any payment by the company on behalf of or for the individual benefit of the shareholder and (d) there must be sufficient accumulated profits in the hands of the company up to the date of .....

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