TMI Blog2012 (8) TMI 1052X X X X Extracts X X X X X X X X Extracts X X X X ..... )(e) of the IT Act. 3. The ld. CIT(A) has erred in law and on facts in deleting the above addition of deemed dividend made for the payments by way of advance or loan by M/s New Era Exports (P) Ltd. and M/s Gee Key Real Estate (P) Ltd. for the individual benefit of the Assessee Co., ignoring the facts that Shri Ajay Agarwal and Shri Girraj Kishor Agarwal respectively were the beneficial share holders in both the above companies and also having substantial interest in the assessee concern M/s Indian Casting Co. and thus the case was squarely covered under the second limb of provision of section 2(22)(e) of the IT Act. 4. The ld. CIT(A) has erred in law and on facts in deleting the above addition placing reliance on some judicial decisions following the decision of Jurisdictional Hon ble ITAT in the case of M/s Nirmala Realtors (P) Ltd. in ITA No.69, 70 71/Agra/2011 wherein Hon ble ITAT has observed that the provisions relating to section 2(22)(e) are ambiguous and has held that intention of the legislature is to tax dividend only in the hands of the share holders (Regd. Share holder) of the lender Co. and not in the hands of concern in which share holder has substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvoked only in the case of a registered shareholder. Vide para no.31 32 of the judgement (cited supra), the Hon ble ITAT observed as under :- 31. Another important issue that arises for consideration is, whether this payment can be assessed in the hands of the assessee as deemed dividend being the payment to a concern where shareholder holds substantial interest, in whose hands the income would be brought to tax whether in the hands of the concern or the shareholder ? The assessing Officer added it in the hands of the concern i.e. the assessee and CIT(A) has also confirmed the same. Even though CBDT Circular No.495 dated September 22, 1987, 168 ITR (St.) 87 states that the deemed dividend would be taxed in the hands of a concern (non-shareholder) if the conditions mentioned in the section are satisfied. However, our view is different in view of the decisions taken by the various courts. 32. The similar issue came up for consideration before Mumbai ITAT (Special Bench) in case of ACIT vs. Bhaumik Colour P. Ltd. 313 ITR 146 (AT). The Special Bench held that the provisions of section 2(22)(e) do not spell out as to whether the income has to be taxed in the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve two companies as deemed dividend in the hands of the assessee. The action of the A.O. is arbitrary, illegal and highly unjustified. Ld. Authorised Representative submitted that section 2(22)(e) of the Act is applicable in respect of payment which was made only to share holder and not in any other case. Ld. Authorised Representative relied upon the following decisions:- S.No. Citation Name of parties 1 83 ITR 170 (SC) CIT vs. C.P. Sarathy Mudaliar 2 122 ITR 1 (SC) Rameshwar Ds Sanwar Mal vs. CIT 3 259 ITR 9 (All) Raj Kumar Singh Co vs. DCIT 4 313 ITR 116 (Raj) CIT vs Hotel Hilltop 5 199 Taxmann 341 (Del) CIT vs Ankitech (P) Ltd. 6 218 ITR 239 (SC) ITO vs. Atchaiah 7 41 ITR 275 (SC) Kantilal Manilal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere made, repayment of loan and other liabilities which is proved by a chart showing the sources of funds with M/s. New Era Exports Pvt. Ltd. before advancing the money to the assessee firm. Ld. Authorised Representative submitted that at no point of time money was advanced out of reserve and surplus. 6. We have heard the ld. Representatives of the parties and records perused. The admitted facts of the case under consideration are that the assessee is a partnership firm. The partnership firm is not a registered share holder of both the private limited companies, however, partners of assessee firm were share holders of the companies. From a reading of the provision of section 2(22)(e) of the Act, it is clear that it comprehends manifold requirements, the first being the payment should be made by way of loan or advance to the concern. Of course, on this aspect, the conclusion has been recorded by the Revenue authorities in favour of the Revenue which is not in dispute. The more important aspect, being the requirement of section 2(22)(e) is that the payment may be made to any concern, in which such shareholder is a member or partner and in which he has substantial interest or any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in the books of account, it cannot be treated as deemed dividend ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal in law, was right in holding that the Assessing Officer has not established that the money was advanced for the benefit of any shareholder and the same has to be taxed in the hands of such shareholder who obtained the benefit and not in the hands of the assesseecompany, following the ratio of decision in the case of ACIT v. Bhaumik Colour (P.) Ltd. 27 SOT 270 (SB) ? 3. Whether on the facts and in the circumstances of the case, the ITAT in law was right in directing the Assessing Officer to allow the amount of provision for leave encashment without appreciating the fact that the disallowance was made as there was no proof of payment furnished to the effect that the same was paid before the due date of filing the return under section 139(1) of the Incomes-tax Act ? 2. For convenience of reference, it would be appropriate to take up the third question initially. The Tribunal has relied upon the judgment of the Calcutta High Court in the case of Exide Industries Ltd. v. Union of India [2007] 292 ITR 4701, in which the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er an advance nor a loan to the assessee but represented misappropriation of funds by the Vice President (Finance). Consequently, even if the amount is treated as deemed dividend within the meaning of section 2(22)(e) it is taxable in the hands of the shareholder and not in the hands of the assessee. Secondly, even on the assumption that this was an amount advanced to the assessee by the CSPL, for the purposes of taxation a deemed dividend would be taxable in the hands of the shareholder and not the assessee to whom the payment was advanced. 4. The Assessing Officer came to the conclusion that the provisions of section 2(22)(e) are attracted the moment a loan or advance is made and the subsequent defalcation of funds was immaterial. The Assessing Officer held that the loan was received from the bank account of CSPL; the money was deposited in the bank account of the assessee and the subsequent defalcation of the funds after the receipt of moneys by the assessee was an extraneous circumstance which made no difference to the application of section 2(22)(e). The Assessing Officer found that Mr. Vikram Tannan who was a Director of the assessee held more than 20 per cent of the equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; 8. Clause (e) of section 2(22) is not artistically worded. For facility of exposition, the contents can be broken down for analysis : (i) Clause (e) applies to any payment by a company not being a company in which the public is substantially interested of any sum, whether as representing a part of the assets of the company or otherwise made after the 31 May, 1987; (ii) Clause (e) covers a payment made by way of a loan or advance to (a) a shareholder, being a 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 (b) any concern in which such shareholder is a member or a partner and in which he has a substantial interest; (iii) Clause (e) also includes in its purview any payment made by a company on behalf of or for the individu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he requirements which are spelt out in the provision. Similarly, a payment made by a company on behalf, of for the individual benefit, of any such shareholder is treated by clause (e) to be included in the expression dividend . Consequently, the effect of clause (e) of section 2(22) is to broaden the ambit of the expression dividend by including certain payments which the company has made by way of a loan or advance or payments made on behalf of or for the individual benefit of a shareholder. The definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. Consequently in the present case the payment, even assuming that it was a dividend, would have to be taxed not in the hands of the assessee but in the hands of the shareholder. The Tribunal was, in the circumstances, justified in coming to the conclusion that, in any event, the payment could not be taxed in the hands of the assessee. We may in concluding note that the basis on which the assessee is sought to be taxed in the present case in respect of the amount of ₹ 32,00,000 is that there was a dividend under section 2(22)(e) and no other basis has been suggested in the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5% (5) Shri Rajiv Khurana 25% Likewise, it is also not in dispute that at the relevant time constitution of the firm was as under :- Constitution of M/s Hotel Hilltop : 1. Shri Roop Kumar Khurana 45% 2. Shri Deshbandhu Khurana 55% The Assessing Officer, in these circumstances, found the amount to be deemed dividend under section 2(22)(e) and assessed it in the hands of the firm. This order was challenged in appeal and the learned Commissioner (Appeals) found that since the firm is not a shareholder of the company the amount of ₹ 10 lakhs cannot be assessed to tax under section 2(22)(e) and thus it was deleted. Against this order of the Commissioner of Income-tax (Appeals), the Revenue filed an appeal before the learned Tribunal and the Tribunal found that the provisions under section 2(22)(e) are deeming provisions and are aimed at including the obvious or what is uncertain or to impose for the purpose of a statute an artificial construction of a word or phrase that would not otherwise prevail. Then the definition, as given in section 2(22)(e) was also considered and found that since the firm is not a shareholder of the company the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... menclature used to borrow the words of the Assessing Officer transparent cover . Be that as it may. The more important aspect, being the requirement of section 2(22)(e) is that the payment may be made to any concern, in which such shareholder is a member or partner and in which he has substantial interest or any payment by any such company on behalf or for the individual 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 paid by the company whether to the shareholder or to the concerned firm. In which event, it would fall within the expression deemed dividend . Obviously, income from dividend is taxable as income from other source under section 56 of the Act and in the very nature of things the income has to be of the person earning the income. The assessee in the present case is not shown to be one of the persons being shareholder. Of course, the two individuals being Roop Kumar and Devendra Kumar are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT vs. Hotel Hilltop (supra) and Hon ble Delhi High Court in the case of CIT vs. Ankitech (P) Ltd. (supra) decided the issue in favour of the assessee but in subsequent judgement Hon ble Delhi High Court in the case of CIT vs. National Travel Services (supra) has decided the issue against the assessee and in favour of the Revenue. Under such circumstances, the Hon ble Supreme Court in the case of CIT vs. Vegetable Products Limited, 88 ITR 192 (SC) has held as under:- There is no doubt that the acceptance of one or the other interpretation sought to be placed on section 271(1) (a)(i) by the parties willful lead to some inconvenient result, but the duty of the court is to read the section, understand its language and give effect to the same. If the language is plain, the fact that the consequence of giving effect to it may lead to some absurd result is not a factor to be taken into account in interpreting a provision. It is for the legislature to step in and remove the absurdity. On the other hand, if two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted. This is a well-accepted rule of construction ..... X X X X Extracts X X X X X X X X Extracts X X X X
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