Contact us   Feedback   Subscription   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2016 (8) TMI 651 - ITAT MUMBAI

2016 (8) TMI 651 - ITAT MUMBAI - TMI - Deemed dividend u/s.2(22)(e) - assessee was having major shareholding - nature of loan received from the company - inter-se transactions between the companies - Held that:- In this case the facts reveal beyond doubt that the transactions in question were out of business requirements between the said three companies which were having running accounts with each other. The assessee has not received any direct or indirect individual benefit out of these transac .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

as out of any commercial expediency or in the course of business and were not gratuitous payments for the benefit of the shareholders, then, applying 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

in 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 SANJAY GARG, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER For The Assessee by : Shri Chetan A. Karia For The Revenue : Dr. S.Pandian ORDER Per Sanj .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he assessee was having major shareholding in 3 companies namely; (i) M/s.Anachem Instruments India P.Ltd. (ii) M/ s. Advance Scientific Equipment P.Ltd. & (iii) M/s. Star Earth Minerals P.Ltd. During assessment proceedings, from the replies filed by the assessee, the AO noticed that M/s. Anachem Instruments India P.Ltd. had advanced an amount of ₹ 31,00,000/- on 16.12.2008 to M/s. Advance Scientific Equipment P. Ltd. and M/s. Advance Scientific Equipment had also advanced an amount of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the balance sheet and P&L account of these two companies and also submitted that the said inter-corporate transactions were in the nature of loan. The AO considered that as per provisions of section 2(22)(e) of the Act, any loan deposit given by a company to another company having a common share holder who is holding not less than 10% of the voting power or to any concern in which such shareholder is a member or a partner and in which he has special interest, such loans deposited is to be d .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 31.0 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

er upheld the finding of AO. Being aggrieved, the assessee has come in appeal before us. 5. Ld. AR of the assessee, before us, has submitted that though the assessee has been a director and shareholder holding more than 50% shares in the above stated three closely held companies but the said three closely held companies had no cross holding of shares i.e. none of the companies hold shares in other two companies. The 3 companies had regular business transaction with each other. He has further sub .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

.Ltd. at ₹ 19,73,863/- and that of M/s. Star Earth Minerals P.Ltd. at Rs.(-)50,29,833/-. The assessee further explained that M/s M/s. Anachem Instruments India P.Ltd. deposited a sum of ₹ 31 lakhs with M/s. Advance Scientific Equipment P.Ltd. and M/s Advance Scientific Equipment P.Ltd. further deposited a sum of ₹ 35 lakhs with M/s. Star Earth Minerals P.Ltd. as inter-corporate deposits. Ld. AR has further submitted that the said deposits were not gratuitous as the interest was .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

r summited alternatively without prejudice to the above pleas, that even for the sake of arguments, if the deposits were assumed to be dividend, even then, the accumulated profit in M/s. Anachem Instruments India P.Ltd. were only ₹ 19,73,863/- and at the best the addition could have been restricted to ₹ 19,73,863/- 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 formi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e or loan to a shareholder, 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 participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

er as representing a part of the assets of the company or other wise) by way of advance or loan to a shareholder or any payment by any such company on behalf or for the individual benefit of a shareholder, to the extent to which the company in either case, possesses accumulated profits; but dividend does not include-....... (ii) any advance or loan made to a shareholder by a company in the ordinary course of its business where the lending of money is a substantial part of the business of the com .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

quot;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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

here that u/s.2(6C) of the Act, 1922, income includes dividend. Similarly under the Income Tax Act, 1961 (in short the Act,1961 ), Section 2(24)(a) states that income includes dividend. 8. Now, if we compare the definition of dividend as provided under the old Act of 1922 with the present Act of 1961, we find that the definition of dividend under the relevant provisions of both the Acts is almost identical. Under the old Act (i.e. Act of 1922), any payment by company in which the public is not s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

hat has been added is that the payment by such a company to any concern in which such shareholder is a member or a partner in which he has a substantial interest has been added which find place between the words …..advance or loan to a shareholder….. . and the words ….or for the individual benefit, of any such shareholder…. We find that the words to any concern in which such shareholder is a member or a partner….. are sandwiched between the first condition of p .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

a shareholder enjoys for simply on account of being a person who is the beneficial owner of shares. The purpose is to bring within the tax net accumulated profits which were distributed by closely held companies to its shareholders in the form of loans to avoid payment of dividend distribution tax u/s. 115 O of the Act, 1961. Thus, the gratuitous loan or advance given by a company to its shareholders would come within the purview of section 2(22) but not to the cases where the loan or advance i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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, havi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

profits which are distributed by closely held companies to his shareholders in the form of loans to avoid payment of dividend distribution tax under Section 115-O of the Act. 10. The Hon ble Karnataka High Court in the case of Bagmane Constructions (P) Ltd. & Ors. Vs. CIT & Anr., (2015) CTR (Kar) 338 has discussed at length the purpose and object of the provisions of Section 2(22)(e) in new the Act. In the aforesaid case, while relying upon the decision of Hon ble Supreme Court in the ca .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning. The Hon ble Karnataka High Court, thus, observed that it is now a well-settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even "do some violence" to it, so as to achieve the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

uot; The Hon ble High Court further relied upon the decision of Hon ble Delhi High Court CIT v. Raj Kumar [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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ell 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 of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

isions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance.' 11. Further in Para 24 of the order in the said case of Bagmane Constructions (P) Ltd. & Anr. (supra), the Hon ble Karnataka High Court has held that the purpose of insertion of sub-clause (e) of Section 2(2 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ch a shareholder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act. Para 24 of the aforesaid decision of the hon ble Karnataka High Court which is most relevant in the context of the matter for the sake of convenience and completeness is reproduced as under :- 24. Therefore, from the aforesaid judgments, it is clear that the purpose of the insertion of sub-clause (e) of Section 2(22) of the Act was to bring within the tax net accumulated profit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ircumstances 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

f shareholders would come within the purview of section 2(22) but not to the cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder. The intention behind the provisions of section 2(22)(e) of the Act is to tax dividend in the hands of shareholders. 12. The Hon ble High Court further while relying upon the decision of the Hon ble Supreme Court in the case of State of Bombay & Ors. Vs. The Hospital Mazdoor Sabha & Ors. , AIR 1960 S .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e words of wider import is doubtful; but, where the object of the legislature in using wider words is clear and free of ambiguity, the rule of construction in question cannot be pressed into service. The Hon ble High Court in para 27of the order has observed as under :- 27. In this background when we look at the aforesaid provision, it is clear that any payment made by a company by way of advance or loan has to be understood in the context of the object with which the said provision is introduce .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ich is that the meaning of a doubtful word may be ascertained by reference to the meaning of words associated with it. This rule, according to Maxwell, means that, when two or more words which are susceptible of analogous meaning are coupled together they are understood to be used 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

dend. 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 transactions would no .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

pra) while relying upon another decision of the Hon ble Apex Court in the case of LIC of India Vs. Retired LIC Officers Association (2008) 3 SCC 321, has observed that each word employed in a statue must take colour from the purport and the object for which it is used. The Principle or purposive interpretation should be taken recourse to. If a literal interpretation is given to the said words, it would mean that all trade advances are to be taxed as deemed dividend. If such an interpretation is .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

o the shareholders after avoiding payment of dividend distribution tax under Section 115-O of the Act. In that view of the matter, it is not possible to accept the interpretation sought to be placed by the revenue. 14. The Hon ble High Court, thus, relied upon various case laws and vide para 29 of the said decision, has rejected the contention of revenue that the payment by a company by way of any advance or loan made to a shareholder would be out of the purview of Section 2(22)(e) of the Act, o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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. S .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

or through its agents provides maintenance services of instruments. For getting the orders, company has to provide demonstration of equipment at user s site and prove feasibility of instrument to the intended buyer. For that purpose, buyers usually provide their samples and parameters to satisfy their requirement and confirm specifications. The another company, namely, M/s. Star Earth Minerals P.Ltd provides scientific and technical services to M/s. Advance Scientific Equipment P.Ltd. @ ₹ .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nstruments and after sale service. It is mainly dealing with and rendering of services of installation, commissioning and after sale services of analytical instruments supplied by M/s. Advance Scientific Equipment P.Ltd., such as installation of instrument, providing onsite training to the users of instruments, providing annual maintenance services. For these services M/s. Anachem Instruments India P.Ltd. raises its bills on M/s. Advance Scientific Equipment P.Ltd.; It has been further explained .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

So far as transaction of ₹ 35 lakhs as advance by M/s. Advance Scientific Equipment P.Ltd. is concerned, it has been explained that during the year M/s. Star Earth Minerals P.Ltd. raised bills totaling to ₹ 39,70,800/- on M/s. Advance Scientific Equipment P.Ltd. A sum of ₹ 4,08,992/- was deducted by the said Advance Scientific Equipment Pvt. Ltd. towards tax, thus, a sum of ₹ 35,61,808/- was outstanding. A sum of ₹ 35 lakhs was received by M/s. Star Earth Minerals .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

hem 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/- re .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ales made to M/s. Advance Scientific Equipment P.Ltd. He has further relied upon page 12 to 16 that the assessee had a running account with these companies and these companies owed money to the assessee as narrated in the initial paras of this order. 17. Ld. AR has further invited our attention to para 2.3 of the impugned order of the CIT(A), wherein ld. CIT(A) has himself observed that the assessee himself had not received any loan/advance from these companies. Ld. CIT(A) further in para 2.3(b) .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ayments to M/s. Anachem Instruments India P.Ltd. and that as on 1-12-2008 the debit and credit amount was same and thus, on the said date nothing was receivable or payable by M/s. Anachem Instruments India P.Ltd. from M/s. Advance Scientific Equipment P.Ltd. and vica-versa.. The facts itself reveal that these companies were carrying on inter-se transactions and were having running accounts, the amounts were paid and returned also and that no part of the said amount was attributed to the sharehol .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ssee. Even otherwise, if the assessee had to receive certain amount 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 tr .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 business requirements between the said three companies which were having running accounts with each other. The assessee has not received any direct or indirect individual benefit out of these transactions. 18. The Hon ble Supreme Court in the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

urther explained the explanation commercial expediency as under :- The expression commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. Hon ble Supreme Court has further held that it is not necessary that loan amount should be exclu .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version