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Shiv Transport and Travels Versus I.T.O., Wd-56 (1) , Kolkata

2016 (3) TMI 630 - ITAT KOLKATA

Deemed dividend addition u/s 2(22) - whether there was any “Loan or Advance” by PIPL to the Assessee? - Held that:- There is no reason whatsoever to doubt the plea put forth by the Assessee that the sum of ₹ 9 lacs was mistaken paid to RBI in the name of the Assessee instead of PIPL. The reason being that the returned income of the Assessee for the relevant AY was only ₹ 4,26,150/-. The Assessee would get credit of TDS of ₹ 70,480 which was allowed by the AO in the order of ass .....

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e” by PIPL to the Assessee. The fact that the rents payable by PIPL to the Assessee were adjusted against the monies refundable by the Assessee to PIPL is a matter of adjustment between the parties. That adjustment cannot be the basis to hold that PIPL has given a “ loan or advance” to the Assessee. The primarily requirement of flow of funds for use by the Assessee from PIPL is essential to say that PIPL gave “Loan or Advance” to the Assessee. Such a requirement being absent in the present case, .....

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₹ 9 lacs made by the AO and confirmed by the CIT(A) invoking the provisions of Sec.2(22)(e) of the Income Tax Act, 1961. The provisions of Sec.2(22)(e) of the Act, reads as follows: Sec.2(22) "dividend" includes- (e) Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31-5-1987, by way of advance or loan to a shareholder, being a person .....

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ich the company in either case possesses accumulated profits. but "dividend" does not include- (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ; (ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised pro .....

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d as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off; (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956); (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company). Explanation 1.-The expression " .....

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the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place. Explanation 3.-For the purposes of this clause,- (a) "concern" means a Hindu undivided family, .....

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entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty percent of the voting power. 3. The provisions of Sec.2(22)(e) treats loan or advance given by a company in which public are not substantially interest as distribution of dividend by the company to its shareholders and chargeable to tax. It is being done to bring within the tax net monies paid by the closely held companies to their shareholders who have substantial intere .....

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shareholder, money in the form of an advance or loan.. Nomenclature of this section which is Deemed Dividend , connotes that this section has been brought on statue as Deeming Fiction . It means that the income termed as dividend is actually not dividend distributed by a closely held company but the amount paid is still treated as dividend and hence the term Deemed Dividend . 4. In the present case the facts are that the Assessee is a partnership firm consisting of four partners viz., Smt.Smiat .....

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en a demand draft for ₹ 9 lacs, bearing No.057467 dated 9.12.2006 in favour of RBI, by debit of its current account No.012010200002293 with Axis Bank, Jamshedpur branch. The same was sent to their auditors at Kolkatta M/S.S.B.Dandeker & Co. The staff of M/S.S.B.Dandeker & Co., one Mr.Raghunandan Dutta, was handed over the aforesaid draft for deposit as advance tax payable by PIPL. He inadvertently prepared the challan in the name of the Assessee viz., Shiv Transport & Travels. .....

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7. In the meantime PIPL wanted the money from the Assessee. PIPL was a tenant occupying the premises owned by the Assessee. It was agreed between the Assessee and PIPL that by way of adjustment of ₹ 9 lacs payable by the Assessee to PIPL, the Assessee will adjust the annual rent of ₹ 1,08,000 payable by PIPL. As upto AY 2012-13 adjustments were made accordingly. 8. The case of the revenue on the above facts is that there was a loan or advance of ₹ 9 lacs received by the Assesse .....

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₹ 9 lacs on behalf of the Assessee to the credit of the Central Government towards tax liability. There was no flow of funds in favour of the Assessee in the sense that the money paid in RBI remained with the Tax department and did not reach the Assessee. For a transaction of loan or advance , the recipient of the loan or advance should have the benefit of use of the sum given as loan or advance and since the money in question was never available for use by the Assessee, it could not be s .....

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Hon ble Allahabad High Court in the case of Raj Kumar Singh & Co. 295 ITR 9 (All), wherein the Hon ble Allahabad High Court held that Clause (e) of s. 2(22) of the Act as it existed clearly provided that if the loan is received by the shareholder, it is only then the said loan can be deemed to be dividend in his hand. In the case before the Hon ble Allahabad High Court, admittedly, the assessee-firm was not the shareholder of the company, M/s Jai Prakash Associates (P) Ltd., which had given .....

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t was settled principle of law that the deeming provision has to be construed strictly. The Hon ble Allahabad High Court also referred to the decision in the case of Howrah Trading Co. Ltd. vs. CIT (1959) 36 ITR 215 (SC) and CIT vs. C.P. Sarathy Mudaliar (1972) 83 ITR 170 (SC). In the later decision, s. 2(6A)(e) of the Act, 1922 was under consideration, which was synonymous to s. 2(22)(e) of the IT Act, 1961. In the said case, members of HUF acquired shares in a company with the fund of the fami .....

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could not, therefore, be deemed to be its income. The apex Court further held that when the Act speaks of shareholder, it refers to the registered shareholder. The Assessee also placed reliance on the decision of the Special Bench in the case of CIT Vs. Bhaumik colour (P) Ltd. 118 ITD 1 (SB)(Mumbai). 10. The CIT(A) however held that the case of the Assessee would be covered by the provisions of Sec.2(22)( e) of the Act and would within the clause Loan or Advance by a company to any concern in w .....

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ec.2(22) ( e) of the Act. The CIT(A) thereafter held as follows: Thus, in my view it is beyond the scope of this appeal to decide on the issue whether the provisions of section 2(22)(e) are applicable in the case of a firm only for the reason that substantial shareholders in the assessee firm also hold substantial stake in the company which made the loan or advance to the assessee firm. The facts regarding the substantial interest of the common partners/shareholders in the company which advanced .....

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ng in the office of M/S S.B. Dandekar & Co., Chartered Accountants to the effect that the draft was to be deposited towards the: advance tax of PIPL and was wrongly deposited by preparing the challan in the name of the appellant firm . It was also stated that the appellant firm was not, required to deposit any advance tax which was also a testimony to the fact that the sum was deposited by mistake in the appellant's name. In my view, this declaration: is self-serving and has been made af .....

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Act as to when the sum of ₹ 9 lakhs was actually refunded by the appellant to PIPL to which the appellant replied that the sum was adjusted against rent receivable from PIPL by the appellant. Thus, whatever might have been the actual reason for depositing the sum of ₹ 9 lacs with RBI on behalf of the appellant, in the final analysis it assumed the character of advance payment made to the appellant and as admitted by the appellant in its reply dated 17.01.2012 to the Id.CIT, even as o .....

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peal before the Tribunal. I have heard the submissions of the learned counsel for the Assessee who reiterated the stand of the Assessee as put forth before the CIT(A). The learned DR relied on the order of the CIT(A) and further submitted that the fact that the sum of ₹ 9 lacs paid as advance tax in the name of the Assessee and that it had never been refunded to the Assessee so far is not borne of the records and such a plea was not taken before the lower authorities. 12. I have given a ve .....

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advance tax liability to the extent of ₹ 9 lacs for the Assessee. The contention of the Assessee therefore that the sum in question was mistaken paid to RBI in the name of Assessee instead of PIPL deserves to be accepted. It is a fact that the sum in question i.e., ₹ 9 lacs never reached the hands of the Assessee and was not available for use by the Assessee. In such circumstances can it be said that there was any Loan or Advance by PIPL to the Assessee. The fact that the rents paya .....

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ec.2(22)( e) of the Act were satisfied. 13. I am also of the view even otherwise the provisions of Sec.2(22)( e) of the Act are not attracted in the facts and circumstances of the present case. The case made out by the CIT(A) was that the case of the Assessee would be covered by the provisions of Sec.2(22)( e) of the Act and would within the clause Loan or Advance by a company to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter .....

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estion has been answered by the Special Bench of ITAT Mumbai in the case of Bhaumik Color (P) Ltd. (supra). In the aforesaid decision the Special Bench was concerned with the second limb of Sec.2(22)(e) of the Act, viz., to any concern in which such shareholder is a member or a partner and in which he has a substantial interest . The Special Bench observed that the following conditions are required to be satisfied for application of the above category of payment to be regarded as Dividend. They .....

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f Sec.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, be beneficially entitled to not less than twenty percent of the income of such concern; and where the concern is a company he must be the owner of shares, not being shares enti .....

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e lender? The Special Bench held that 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. The Special Bench on the above issue has observed as follows:- 30. At the outset it has to be mentioned that provisions of Sec.2(22)(e) which brought in a new category of payment which was to be considered as dividend as introduced by the Finance Act 1987 w.e.f.1-4-88 viz., payment by a company to .....

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527(Raj). The facts of the case before the Hon ble Court were as follows. The Assessee was one M/S.Hotel Hilltop a partnership firm. This firm received an advance of ₹ 10 lacs from a company M/S.Hilltop palace Hotels (P) Ltd. The shareholding pattern of M/S.Hillltop Palace Hotels (P) Ltd., was as follows: 1. Shri Roop Kumar Khurana : 23.33% 2. Smt.Saroj Khurana : 4.67% 3. Vikas Khurana : 22% 4. Deshbandhu Khurana: 25% 5. Shri.Rajiv Khurana : 25% The constitution of the firm Hotel Hill Top .....

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as treated as deemed dividend in the hands of M/S.Hotel Hill Top, the firm under the Second limb of Sec.2(22)(e) of the Act. The CIT(A) held that since the firm was not the shareholder of the company the assessment as deemed dividend in the hands of the firm was not correct. The order of the CIT(A) was confirmed by the Tribunal. On Revenue s appeal before the Hon ble High Court, the following question of law was framed for consideration:- Whether on the facts and in the circumstances of the case .....

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benefit of any such shareholder ……. Thus, the substance of the requirement is that the payment should be made on behalf of or for the individual benefit of any such shareholder, obviously, the provision is intended to attract the liability of tax on the person, on whose behalf, or for whose individual benefit, the amount is pad by the company, whether to the shareholder, or to the concerned firm. In which event, it would fall within the expression deemed dividend . Obviously, incom .....

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hands of the firm, rather it would obviously be deemed dividend in the hands of the individuals, on whose behalf, or on whose individual benefit, being such shareholder, the amount is paid by the company to the concern. Thus, the significant requirement of section 2(22)(e) is not shown to exist. The liability of tax, as deemed divided, could be attracted in the hands of the individuals, being the shareholders, and not in the hands of the firm. 32. The aforesaid decision of the Hon ble Rajasthan .....

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r held as follows:- 34. We are of the view that the provisions of Sec.2(22)(e) does not spell out as to whether the income has to be taxed in the hands of the shareholder or the concern(non-shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of Sec.2(22)(e) of the Act. 35. The intention behind enacting provisions of section 2(22)(e) are that closely held companies (i.e. companies in which public are not substantially inter .....

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ch 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 it s 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 l .....

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nstead 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 of a non-shareholder viz., concern. A loan or advance received by a concern is not in the nature of income. In other words there is a deemed accrual of inc .....

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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 advances to a shareholder or to a concern in which a shareholder is substantially interested deeming them as Dividend in .....

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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 non-shareholder. 16. The aforesaid view has since been approved in several decisions rendered by Hon ble High Court of Bombay and Delhi in the case of CIT Vs. Universal Medicare Pvt. Ltd., 324 ITR 263 (Bom) and CIT Vs. Ankitech Pvt.Ltd. & others 340 ITR 14 (Del.). Since the Assessee in the present case is not a shareholder in the lender company, I am of the .....

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