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2016 (7) TMI 1007 - ITAT MUMBAI

2016 (7) TMI 1007 - ITAT MUMBAI - TMI - Revision u/s 263 - deemed dividend u/s. 2(22)(e) - Held that:- The loan or advance or payment is, under such circumstances, to be deemed as dividend to the extent the paying company has accumulated profits, the exception being where the lending company is in the business of money lending. We have already noted satisfaction of all the required conditions in the present case, as well as of the lending companies being not in the money lending business, so tha .....

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act have substantial interest in both the concerns, MKF and MKI, so that limb (b) could not, in any case, be applied. In fact, the assessment in that case was of ‘undisclosed income’, on the basis of a dairy seized in search, and which revealed the source of funds invested by the assessee in bonds, tracing the source thereof (on the basis of the said diary) to two concerns, and which had been, in turn, released funds by the payer company in which (the assessee) had substantial interest. It was o .....

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.2016 setting aside her assessment for the assessment year (A.Y.) 2011-12 vide order dated 14.2.2014. 2. The facts of the case are that the assessee, an individual, and her husband, Shri Vivek V. Samant (VVS), both individually hold substantial voting power (i.e., in excess of 10%) during the relevant year in three companies in which public is not substantially interested, i.e., YBPL, YCPL and YIEPL, as under:- Sr. No. Name of the concern % shareholding of Sh. Vivek D Samant % shareholding of Na .....

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oan taken Loans during the year 1 Yasham Cemphar Pvt. Ltd. Rs.10,00,000/- 2 Yasham Importers & Exporters Pvt. Ltd. Rs.1,82,00,000/- Total Rs.1,92,00,000/- It was under these circumstances, drawing support from the decisions in CIT vs. Universal Medicare (P) Ltd. [2010] 324 ITR 263 (Bom) and Asst. CIT vs. Bhaumik Colour (P). Ltd. [2009] 27 SOT 270 (Mum)(SB), held by the ld. CIT, in exercise of his revisionary powers u/s. 263 of the Act, that the amounts lent are liable to be deemed as dividen .....

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appreciating the facts of the case. 3. Before us, the ld. Authorised Representative (AR), the assessee s counsel, while confirming that there was no dispute as regards the primary facts/data, i.e., the shareholding and the amounts lent, raised several arguments. The main thrust of these arguments was that no benefit had been derived by the assessee or had arisen to her by these loans. The same were, in fact, repaid during the relevant year itself and, further, with interest. There was thus no oc .....

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KI , had advanced ₹ 5.99 crs. to the firms, and which had been utilized by the assessee for the purchase of (RBI) bonds, so that the monies had been diverted for the benefit of the assessee holding more than 10% voting power in MKSEPL. Under these circumstances, the Hon ble Court upheld the order by the tribunal confirming the application of s.2(22)(e), reversing that of the Hon ble High Court, which had earlier held otherwise. Reliance in this context was also placed by him on the decisio .....

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nue on the ground of non-application of mind and failure to make proper enquiry (refer, inter alia, Malabar Industrial Co. Ltd. vs. CIT [2000] 243 ITR 83 (SC); Toyota Motor Corporation vs. CIT [2008] 306 ITR 52 (SC); Gee Vee Enterprises vs. Addl. CIT [1975] 99 ITR 375 (Del); and Rajalakshmi Mills Ltd. Vs. ITO [2009] 121 ITD 343 (Ch.)(SB)). So, however, the ld. CIT, the competent authority, has given a definite direction to the AO to frame fresh assessment, setting aside that made in the first in .....

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hellip;……. (22) dividend includes- (a) ………….. (b) …………. (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 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividen .....

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es not include- (i) …………. (ia) ………… (ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub- clause (e), to the ext .....

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eferring to some of it s decisions, which are locus classicus on the subject, as follows: In Navnit Lal C. Javeri vs. K. K. Sen, AACIT [1965] 56 ITR 198 (SC), where the challenge was to the vires of the provision of section 12(1B) r/w s. 2(6A)(e) of the Indian Income Tax Act, 1922 (hereinafter the 1922 Act ), the Hon ble Court per it s constitutional bench upheld the constitutionality thereof, also finding the same as not violating fundamental rights guaranteed under Article 19(1)(f) and (g) of .....

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e Hon ble Court noted a circular by the Board providing a window whereby the provision was excepted on genuine repayments of such outstanding by 30.6.1955 (Circular No. 20 (XXI-6/55) dated 10.5.1955). The Hon ble Court examined several precedents, including challenges to the provision of section 12B, enhancing the scope of income to include capital gains ; to section 23A(1), providing an artificial dividend payout at a minimum of 60%, lest the shortfall therein be liable to super-tax, i.e., rest .....

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ntended or designed to defeat. The word income , it opined, also making reference to the precedents which considered legislative competence, must receive a wide interpretation, the caveat being that there has to be a rational connection between the item taxed and the concept of income liberally construed. It also noted suitable conditions/exceptions being provided for in the impugned provisions (of ss. 2(6A)(e) and 12(1B)), as by way of restriction on their scope to transactions of/by companies, .....

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n may cause hardship in some cases was considered as irrelevant (for determining the question of legislative competence). The argument with regard to the loan being interest bearing, and of it having been repaid since, were advanced and considered as not valid grounds for excluding the loan or advance given from the purview of or for the purpose of deeming the same as dividend (refer pgs. 208-210), which we may reproduce for ready reference: The loan may carry interest and the said interest may .....

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592, p. 341 as (at pg. 208): "Generally speaking, surtax is charged only on individuals, not on companies or other bodies corporate. Various devices have been adopted from time to time to enable the individual to avoid surtax on his real total income or on a portion of it, and one method involved the formation of what is popularly called a one- man company'. The individual transferred his assets, in exchange for shares, to a limited company, specially registered for the purpose, which t .....

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f any part of these savings he could effect this by borrowing from the company, any interest payable by him going to swell the savings fund; and at any time the individual could acquire the whole balance of the fund in the character of capital by putting the company into liquidation." (emphasis, ours) Continuing further, it held: What Simon says about one-man company can be equally true about the controlled company whose affairs are controlled by a group of persons closely knit and having t .....

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x is evaded. That is the assumption made by the legislature in making this provision. How can it be urged that either the shareholder who is taxed, or the other shareholders who deliberately make the advance to a colleague of theirs, are unfairly dealt with by the impugned provision. (pg. 210) (emphasis, ours) It was also clarified that the condition of accumulated profits would be as on the date of the loan or advance (pg.202). In Tarulata Shyam vs. CIT [1977] 108 ITR 345 (SC), it was sought to .....

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availment of the next loan/advance, are liable to be added separately in computing deemed dividend. These results, it was contended, were definitely unreasonable, oppressive and absurd. Further, the dividend must be treated as paid by the company on the last day of the year (in with the payment is made), as indeed was a case in section 108 of the Common Wealth Act, reading which condition into the section, it was submitted, would eliminate the ill-effects referred to earlier. The Hon ble Court w .....

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conditions are satisfied. (pg. 358) In rejecting the assessee s appeal, the Hon ble Court relied on the salutary principle of interpretation of statutes, further adding that once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be. In its view, the Parliament had deliberately omitted to import the last limb of section 108(1) of the Common Wealth Act, providing instead for exclusion only f .....

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ng on the principle that the legal fiction comes into play as soon as the monies were received. The fact that the assessee was stated to be maintaining a running account with payer-company was found irrelevant. 4.3 Having transversed the settled law, we may consider the arguments raised by the assessee before us, i.e., in light of the obtaining facts of the case. Clearly, there is no dispute qua the primary facts, which are admitted, and there is, accordingly, satisfaction of the conditions for .....

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s received during the relevant year that could be charged as deemed dividend for that year. So however, we find that the amount, reckoned by the ld. CIT at ₹ 182 lacs and ₹ 10 lacs for YIEPL and YCPL respectively, is only without considering the opening balance, i.e., represents only the amounts paid during the year, and toward which we have perused the copies of account of both the payer (lender) and the payee (borrower) companies (PB pgs. 1-5/also refer table at para 2 above). Then .....

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red loans , which answer the description of a loan , as generally understood, being not defined under the Act. Reference in this context may also be made to Shitlal Kumar Vij v. Astt. CIT (in ITA No. 406/Asr./2009 dated 20/9/2012), wherein the tribunal refers to the dictionary (Black Law s) meaning of the word (at para 7.1). Two, the lending companies are not in the business of lending of money. In fact, the accounts are in the nature of running accounts, with amounts being both paid and receive .....

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any loan or advance , so that it would mean just that, i.e., a loan or advance of any nature. The argument with regard to inter-corporate deposits (ICDs) is under the circumstances misconceived and untenable, both on facts and in law. The main thrust of the assessee s arguments, relying on the decision in Mukundray K. Shah (supra), was that whenever a loan or advance is given, the benefit clause of the provision is to be satisfied, i.e., in all cases where the provision is to be applied. We fin .....

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d reading thereof, the provision is triggered where: a) a loan or advance is given by a company (in which the public is not substantially interested) to a shareholder who beneficially owns shares therein to the extent not less than 10% of the voting power therein; or b) a loan or advance is given by such a company to any concern in which such shareholder has substantial interest (explained as entitling him to a beneficial interest in 20% of its income); or c) any payment is made by such a compan .....

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It is clearly limb (b) supra that is attracted in the present case, and which does not provide for a further requirement to show that the monies were intended for the benefit of such shareholder. There is nothing in the decision to suggest such a benefit being required to be shown in all cases. In the facts of that case, it was limb (c) supra that was applied. The assessee- respondent in Mukundray K. Shah (supra) did not in fact have substantial interest in both the concerns, MKF and MKI, so tha .....

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nd which was upheld by the Hon ble Court. The reliance on the said decision is, thus, completely misplaced. Apart from Mukundray K. Shah (supra), the assessee places reliance on Bagmane Constructions (P) Ltd. (supra). The question of law that arises for and considered by the Hon ble Court was: Whether any payment by a company by way of advance or loan to a shareholder or to any concern made u/s. 2(22)(e) of the Income Tax Act, 1961, to the extent to which the company possessed the accumulated pr .....

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see as to how the said decision assists the assessee s case which, as afore-stated, is a case of loan (or advance) per se. The aspect of charge of interest (on loan or advance) has already been considered by the Apex Court as irrelevant, and which, being charged in the instant case itself proves the loan (advance) to be not a trade advance. Rather, where the advance is in the course of a commercial transaction between the advancing and the advancee- company, it is not a loan or advance proper fo .....

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