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2016 (10) TMI 2 - ITAT KOLKATA

2016 (10) TMI 2 - ITAT KOLKATA - TMI - Deemed dividend addition by applying the provisions of section 2(22)(e) - held that:- Since the Assessee in the present case is not a shareholder in the lender company, in the light of the intention behind the provisions of Sec.2(22)(e) and in the absence of indication in Sec.2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a non-shareholder cannot be taxed as Deemed Divi .....

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a Industries (P) Ltd., of ₹ 3,62,46,645/-. The AO was of the view the said amount received as loan should be treated as deemed dividend u/s. 2(22)(e) of the Income Tax Act, 1961 (Act). The assessee submitted that it was not a shareholder in M/s.Pataka Industries (P) Ltd., and consequently the amount could not be held to be deemed dividend by applying the provisions of section 2(22)(e) of the Act. 3. The AO however, was of the view that though the Assessee was not a shareholder in M/s.Patak .....

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er of the Tribunal in Assessee s own case in the earlier year on identical issue. The following were the relevant observations of the CIT(A) in this regard: 5. The Ld. AR has submitted that the provisions of section 2(22)(e) was not attracted as the assessee was not a shareholder in M/s. Pataka Industries (P)Ltd from which loan was received. He had further submitted that the issue was covered by the order of jurisdictional ITAT for the assessment year 2006-07. For in that year, similar addition .....

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ble Rajasthan High Court in the case of CIT vs Hotel Hilltop reported in 313 ITR 116 (Raj) is directly in favour of the assessee is not a shareholder of Pataka Industries (P)Ltd and accordingly, proceedings u/s 2(22)(e) could not be initiated against the assessee and the amount of loan could not be treated as deemed dividend in the hands of the assessee. However, the learned DR relied on the order u/s 263 of the learned Commissioner of Income Tax. 4. On consideration of rival submissions, we are .....

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issue was again decided in favour of the assessee in its own case for the assessment year 2009-10 by the jurisdictional ITAT A Bench, Kolkata in ITA No.1803/Kol/2012. I have perused the relevant orders and considered the submissions made on behalf of the assessee. The contention that the assessee company was not a shareholder in M/s. Pataka Industries (P)Ltd. From which loan was received has not been disputed by the AO in his assessment order. In such factual background, I find that the issue is .....

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the submission of the learned DR who relied on the order of the AO. The learned counsel for the Assessee relied on the order of the CIT(A) and filed before us copy of the order of the Hon ble High Court of Calcutta, in G.A.No.3188 of 2013 dated 11.11.2014 wherein the Hon ble High Court dismissed the appeal preferred by the Revenue against the order of the Tribunal in ITA No.1803/Kol/2012 dated 16.5.2013 based on which the CIT(A) allowed relief to the Assessee in AY 2009-10. 7. We have heard the .....

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ut 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, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. Explanation-3 to Section 2(22)(e) is as follows: Exp .....

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ion to a company, means 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, carrying not less than twenty percent of the voting power. 7.2. An analysis of the above provisions shows that there are three limbs to Sec.2(22)(e) which are as follows:- 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 t .....

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referred to as the said concern) Third limb (c) 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. 7.3. In the present appeal we are 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 following conditions are required to be satisfied for .....

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is expression only refers to the shareholder referred to in the earlier part of 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 .....

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(22)(e) of the Income Tax Act, 1961 can be assessed in the hands of a person other than a shareholder of the 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 .....

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tter of consideration before the Hon ble Rajasthan High Court in the case of CIT Vs. Hotel Hilltop. 217 CTR 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 Khura .....

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.Hotel Hill Top. Therefore the loan by M/S.Hill Top Palace Hotels (P) Ltd. To the firm M/S.Hotel Hill Top was 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 followi .....

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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 pad by the company, whether to the shareholder, or to .....

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requisite interest, in the firm, but then, thereby the deemed dividend would not be deemed dividend in the 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, be .....

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t did not deal with the second limb of Sec.2(22)(e) of the Act is not correct. 7.5. The Special Bench further 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 .....

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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. 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 .....

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the company and the person who can control the affairs of the concern can drawn the same from the concern instead 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 a .....

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of the Act is an inclusive definition. Such inclusive definition enlarges the meaning of the term Dividend 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 .....

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