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2016 (8) TMI 651

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..... ing the same analogy, such payments made through inter-corporate transactions between the parties cannot be treated deemed dividend at the hands of the assessee-shareholder. The coordinate Visakhapatnam Bench in the case of “M. Amareswara Rao Vs. DCIT” [2016 (2) TMI 379 - ITAT VISAKHAPATNAM ] has observed that a careful study of the provisions of Section 2(22)(e) make it clear that the Legislature wanted to bring to tax the amount paid by closely held companies to their principle shareholders to avoid dividend distribution tax and that the provisions of section 2(22)(e) of the Act must be made applicable, wherein the dividend is paid in the guise of loan or advance to avoid tax. But to apply the provisions of Section 2(22)(e) of the Act, an honest attempt is to be made to understand, whether the impugned amount is a loan or advance within the meaning of said section. Thus payments made through inter-se transactions between the companies cannot be termed as any gratuitous payment to the assessee shareholder and, thus, the provisions of Section 2(22)(e) are not applicable in this case. - Decided in favour of assessee - ITA No.5410/Mum/2012 - - - Dated:- 15-6-2016 - SHRI SAN .....

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..... by any assessee from the company in which the assessee is having substantial interest, and even if, there are repayments of the loan, such loan or deposit will have to be treated as deemed dividend. The AO held that the receipt of loan and substantial holding of the assessee in the shares of M/s. Anachem Instruments India P.Ltd., M/s. Advance Scientific Equipment P.Ltd. M/s. Star Earth Minerals P.Ltd. was an accepted fact. In respect of accumulated profits, M/s. Anachem Instruments India P.Ltd. had reserves and surplus amounting to ₹ 28,40,948/- as on 31.03.2009 and ₹ 20,42,863/- as on 31.03.2008. Similarly, M/s. Advance Scientific Equipment P.Ltd. had reserves and surplus of ₹ 1,51,81,196/- as on 31.03.2009 and ₹ 1,51,70,953/ - as on 31.03.2008. The assessee had not brought anything on record to prove that there was no profit available to the said companies as on the date of advancing of loans. In the facts and circumstances, the AO held that the loan of ₹ 66,00,000/- was deemed dividend in the hands of the assessee u/s.2(22)(e) of the Act. The AO added back the same into the income of the assessee. 4. Being aggrieved by the order of AO, assesse .....

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..... 9,73,863/- instead of ₹ 31 lakhs. Ld. AR has further submitted that even otherwise advance made by M/s. Anachem Instruments India P.Ltd. amounting to ₹ 31 lakhs was forming part of the advance to M/s. Advance Scientific Equipment P.Ltd. amounting to ₹ 35 lakhs and at the most the net amount of ₹ 35 lakhs can only be taxed u/s.2(22)(e) of the Income Tax Act. But the AO wrongly taxed the aggregate of the entire amount involved in the transactions amounting to ₹ 66 lakhs as deemed dividend u/s.2(22)(e) of the Act. 6. On the other hand, ld. DR has relied upon the findings of lower authorities and has contended that in view of the specific provisions of Section 2(22)(e) of the Act, the above transactions squarely fall within the mischief of deemed dividend as per the definition of dividend provided u/s.2(22)(e) of the Act and, thus, the AO has rightly taxed the said amount in the hands of the assessee. 7. We have considered rival contentions and also gone through the record. To understand the entire context of the transactions and whether the payment made by the closely held companies to each other would constitute deemed dividend u/s.2(22)(e) of the .....

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..... pose of the Act. Section 12(1) provides that the tax shall be payable by an assessee under the head Income from other sources in respect of income, profits and gains of every kind which may be included in his total income (if not included under any of the preceding heads). Section 12(1B) provides : any payment by a company to a shareholder by way of advance or loan which would have been treated as a dividend within the meaning of clause ( e ) of sub-section (6A) of section 2 in any previous year relevant to any assessment year prior to the assessment year ending on the 31st day of March, 1956, had that clause been in force in that year, shall be treated as a dividend received by him in the previous year relevant to the assessment year ending on the 31st day of March, 1956, if such loan or advance remained outstanding on the first day of such previous year. Both these provisions, viz., section 2(6A)( e ) and section 12(1B), were introduced in the Act by the Finance Act, 1955 (15 of 1955), which came into operation on the 1st of April, 1955. We would like to mention here that u/s.2(6C) of the Act, 1922, income includes dividend. Similarly under the Income Tax Act, .....

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..... business or out of business expediency or in return to an advantage conferred upon the company by such shareholder. 9. The Hon ble Supreme Court in the case of Navnit Lal C. Javeri vs. K. K. Sen , Appellate Assistant Commissioner of Income Tax, reported in (1965) 56 ITR 198 (SC) while analyzing the relevant provisions of Section 2(6A)(e) of the Act of 1922, has observed that three kinds of payments made to the shareholder of a company to which the said provisions apply, are treated as taxable dividend to the extent of the accumulated profits held by the company. These three kinds of payments are: (i) payments made to the shareholder by way of advance or loan ; (ii) payments made on his behalf ; and (iii) payments made for his individual benefit. However, under the New Act (i.e. the Act of 1961), under Section 2(22)(e) to constitute deemed dividend, following conditions can be summed up :- (i) payments by way of advance or loan to a beneficial or a shareholder, having shareholding not less than 10% of voting power; or (ii) to any concern in which such shareholder is a member or a partner having substantial interest therein; (iii) payment made on his behalf, .....

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..... r [2009] 318 ITR 462(Delhi) and Hon ble Kolkata High Court in the case of Pradip Kumar Malhotra Vs. ITO (2011) 338 ITR 538 (Cal), and has observed that the combined meaning of the various clause of provisions of section 2(22)(e) of the Act is to mean that the payments included as deemed dividend would mean the gratuitous payments to a shareholder meant to avoid the taxation of Income u/s.115O of the Act. The Hon ble High Court (supra) further relied upon the decision of Hon ble Delhi High Court in the case of CIT Vs. Ankitech (P) Ltd. Ors. (2012) 340 ITR 14 (Del) and reproduced the relevant part of the decision of the Hon ble Delhi court( supra) as under: 22 . The Delhi High Court in the case of CIT Vs. Ankitech (P) Ltd. Ors. (2011) 242 CTR (Del) 129 : (2011) 57 DTR (Del) 345 : (2012) 340 ITR 14 (Del), explaining the meaning of the word concern found in the provisions as well as Expln. (3), where the meaning of the said word is expressly given, held as under:- '24. The intention behind enacting the provisions of section 2(22)(e) is that closely-held companies (i.e., companies in which public are not substantially interested), which are controlled by a group .....

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..... ng that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding payment of tax by having these companies pay or distribute money in the form of advance or loan. Loan or advance given to the shareholders or to a concern, under normal circumstances would not qualify as dividend. If such loan or advance is given to such shareholder 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. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or 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. It is so made by legal fiction created under Section 2(22)(e) of the Act. Thus, the definition of dividend has been enlarged, and that loan or advances given under the conditions specified under this pro .....

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..... ed in their cognate sense. They take as it were their colour from each other, that is, the more general is restricted to a sense analogous to a. less general. In the case of a loan, money is advanced generally on payment of interest. In other words the loan advanced has to be repaid with interest. In the case of an advance also, the element of repayment is there but such a repayment may be with interest or without interest. Therefore, when the said two words are used in the aforesaid provision with the purpose of levying tax, if the intention of such advance or loan is to avoid payment of dividend distribution of tax under Section 115-O of the Act., such a payment by a company certainly constitutes a deemed dividend. But if such a payment is made firstly not out of accumulated profits and secondly even if it is out of accumulated profits, but as trade advance as a consideration for the goods received or for purchase of a capital asset which indirectly would benefit the company advancing the loan, such advance cannot be brought within the word 'advance' used in the aforesaid provision. The trade advance which is in the nature of money transacted to give effect to commercial .....

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..... s.(2) of s.22 of the Act is not at all attracted. 15. Now, in the light of the aforesaid proposition of law laid down by the Hon ble Karnataka High Court (supra) while relying upon various decisions of the Hon ble Supreme Court and Hon ble Delhi High Court as well as Hon ble Kolkata High Court, we examine the facts of the assessee in the present case. Admittedly, the assessee is a director in three closely held companies. It is also undisputed fact that the company M/s. Anachem Instruments India P.Ltd. paid ₹ 31 lakhs to M/s. Advance Scientific Equipment P.Ltd. which in turn paid a sum of ₹ 35 lakhs to M/s. Star Earth Minerals P.Ltd. The assessee has explained that M/s. Advance Scientific Equipment P.Ltd. is a parent company, which is an Indian representative of foreign manufacturer of analytical instruments, which are usually supplied to industries like Cement, Chemical, Petroleum, University, Educational Institutions, Hospitals, Government Laboratories etc. After imports of the machinery and equipments, the company does the installation and commissioning of instruments. The company either directly or through its agents provides maintenance services of instruments. .....

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..... ed by M/s. Star Earth Minerals P.Ltd.. which the company treated as inter-corporate deposit instead of treating the same as payment against the bills outstanding. 16. Ld. AR in this respect has relied upon the balance sheet of M/s. Advance Scientific Equipment P.Ltd. and M/s. Anachem Instruments India P.Ltd. Ld. AR of the assessee has further relied upon the paper book at page 5 to show that there were other transactions also and that the M/s. Advance Scientific Equipment P.Ltd. had a running account in the books of M/s. Anachem Instruments India P.Ltd. In this respect, ld. AR relied upon the entry dated 3-4-2007 by which M/s. Anachem Instruments India P.Ltd. has made a payment of ₹ 5 lakh to M/s. Advance Scientific Equipment P.Ltd. on 17-4-2007, by which an amount of ₹ 35,000/- had been paid to M/s. Advance Scientific Equipment P.Ltd. through proper banking channel. Further there are entries dated 20-12-2007 and 24-12- 2007 in relation to certain transaction of ₹ 38,3209/- and ₹ 23,5436/- respectively on account of some sales of shares/spare parts. There is a running ledger account of M/s. Advance Scientific Equipment P.Ltd. in the books of M/s. Anachem .....

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..... ount from the said company, then under such circumstances, any payment, which is not more than that such company owes to the assessee, made by the said company to the assessee will not constitute deemed dividend u/s.2(22)(e) of the act. The other important issue is that the payments were not gratuitous or for the benefit of the shareholder. There is also merit in the contention of ld. AR that same amount was routed in the chain of transactions i.e. amount of ₹ 31 lakhs by M/s. Anachem Instruments India P.Ltd. to M/s. Advance Scientific Equipment P.Ltd. and in turn M/s. Advance Scientific Equipment P.Ltd. paid the amount of ₹ 35 lakhs to parent company. Under such circumstances it cannot in any manner be held that the assessee had received the benefit of ₹ 66 lakhs i.e. the total amount of transaction. Under the circumstances, there is merit also in the alternate contentions raised by the assessee. As held by Hon ble Karnataka High Court and other High Courts and Hon ble Supreme Court, the object and purpose of Section 2(22)(e) is to check escapement of tax u/s.155-O but in this case the facts reveal beyond doubt that the transactions in question were out of bus .....

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