TMI Blog2016 (12) TMI 1297X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Income by way of dividends being exempt in the hands of shareholder in view of the provisions of Section 10(34) read with Section 115-O - Held that:- A bare perusal of Section 10(34) read with Section 115-O makes it abundantly clear that by virtue of said provisions, only the amount declared, distributed or paid by the domestic company by way of dividends whether out of current or accumulated profits made chargeable to additional income tax in the hands of the company, stands excluded from the computation of the income of any person and not the deemed dividend in terms of provisiosn of Section 2 (22)(e) of the Act of 1961. Thus, the loan or advance by closely held company to the shareholder, which is treated to be deemed dividend by virtue of provisions of Section 2 (22)(e) of the Act of 1961, continues to remain liable to be taxed in the hands of the recipient. - D. B. Income Tax Appeal No. 28, 29 / 2012 - - - Dated:- 22-12-2016 - Sangeet Lodha And Vinit Kumar Mathur, JJ. For the Petitioner : Mr. Anjay Kothari Mr. Bhagirath Patel For the Respondent : Mr. K.K. Bissa Mr. G.S. Rathore JUDGMENT By the Court: ( Per Hon ble Mr.Sangeet Lodha, J. ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd ₹ 8,00,000/- from Sisarama Plastics Pvt. Ltd. be not added to the income of the assessee company under Section 2(22)(e) of the Act of 1961. The assessee company by way of reply to the notice clarified that it has taken loan from Sun Polytex Pvt.Ltd. a sum of ₹ 55,00,000/- as corporate loan instead of ₹ 75,00,000/- and paid interest ₹ 1,05,534/- @ 12% and also deducted the tax at source a sum of ₹ 23,682/-. The balance as on 31.3.06 was disclosed as ₹ 57,27,988/-. The assessee contended that he has taken loan from Sun Polytex Pvt. Ltd. in ordinary course of its business. While referring to the Memorandum of Association of Sun Polytex Pvt. Ltd., the assessee company submitted that Sun Polytex Pvt.Ltd. is engaged in business of manufacturing of PP/HDPE Fabric as well as financing to the companies/firms as inter corporate loans on interest at the rate prevailing in the market and the said company has earned ₹ 2,97,552/- as interest during the year. The assessee company contended that by virtue of provisions of Section 2(22)(e)(ii) of the Act of 1961, the dividend does not include any advance or loan made by a company to a shareholder or to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d dividend in the hands of assessee. However, the issue of addition of loan amount to the income of the assessee as deemed dividend during the assessment year 2007-08 has been restored to the file of the AO to ascertain as to whether the advance during the year exceeds the closing balance of earlier year. The ITAT observed that in case it exceeds then the amount to be treated as dividend in view of finding arrived at for assessment year 2006-07 and if the amount is less then no addition will be made because the advance in immediately preceding year has already been treated as deemed dividend. Hence, these appeals. 8. On 22.7.13, the appeals preferred by the assessee company were admitted by this Court on the following substantial questions of law : (i) Whether, ITAT has grossly erred in misconstruing the provisions of section 2(22)(e) by ignoring the exception carved out by sub-clause (ii) of Section 2(22) and by not appreciating the settled position of law that transactions entered in the ordinary course of business are not hit by section 2(22)(e) of the Act ? (ii) Whether the impugned order dt. 9.12.2011 passed by the ITAT is liable to be set aside in view of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d gains of the business . Learned counsel submitted that business of money lending consisted a substantial part of business of Sun Polytex Pvt. Ltd. and the money was advanced to the assessee company in the ordinary course of its business activity. Relying upon a decision of High Court of Bombay in the matter of Commissioner of Income Tax Vs. Parle Plastics Ltd. and another (2011) 332 ITR 63, learned counsel submitted that the expression substantial part does not connote an idea of being the major part or the part that constitute majority of the whole. Learned counsel submitted that any business of a company, which the company does not regard as small, trivial or inconsequential as compared to the whole of the business is substantial business. Learned counsel submitted that Sun Polytex Pvt. Ltd. during the assessment year 2006-07 has earned interest income, a sum of ₹ 2,97,552/- and thus the money lending has to be treated as substantial part of its business and therefore, the provisions of Section 2(22)(e) cannot be validly invoked in view of specific exception carved out in sub-clause (ii) of Section 2(22)(e) of the Act of 1961. Lastly, learned counsel submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeals may be beneficially quoted: 2(22) dividend includesxxx . xxxxx.. (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 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, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; but dividend does not include- (i) .xxxxx ...xxxxx. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held company by way of loans or advances to certain share holders of the company or to the concern/companies in which they have substantial interest shall be treated to be dividend by deeming fiction, which is not actually dividend distributed by closely held company and shall be liable to be taxed in the hands of the recipient to the extent to which the closely held company has accumulated profits. 18. As noticed hereinabove, the assessee company has received a sum of ₹ 55,00,000/- during the relevant assessment year from the closely held company M/s. Sun Polytex Pvt. Ltd. wherein, the assessee company has more than 10% of the shares. The record does not reflect that the loan advanced by M/s. Sun Polytex Pvt. Ltd to the assessee company in the previous year relevant to the assessment year was inter corporate deposit. Merely because, the assessee company has paid the interest to the closely held company and also deducted the tax at source, the loan taken cannot be treated to be inter corporate loan received in ordinary course of business. In other words, on account of the payment of interest by the assessee company to the closely held company against the loan advanced or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of deemed dividend under Section 2 (22) (e). 22. In Pradip Kumar Malhotra s case (supra), the Calcutta High Court opined that the phrase by way of advance or loan appearing in sub-clause (e) of Section 2 (22) must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is beneficial owner of shares (not being shares entitled to a fixed rate of dividends whether with or without a right to participate in profits) holding not less than 10% shares of voting powers, but where such loan or advance is given to such shareholder as a consequence of any other consideration which is beneficial to the company, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act of 1961 and accordingly, taking into consideration the fact that the loan advanced by the company to a shareholder, the assessee, who permitted company to mortgage his immovable property for enabling company to secure loan and in spite of request of the assessee, the company was unable to release the property from the mortgage, the loan advanced was not treated to be gratuitous and deemed dividend within the meaning of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hands of shareholder in view of the provisions of Section 10(34) read with Section 115-O of the Act of 1961, it is true that by virtue of provisions of Section 10(34), any income by way of dividend referred to in Section 115-O shall not be included in computing the total income of a previous year of any person and thus, the recipient of the income of dividend shall not be liable to pay the tax on dividend income inasmuch as, under the new scheme, the dividend in the hands of recipient is tax free and the dividend paying company has been made liable to pay tax on the amount of dividend declared, distributed or paid by it. But then, the deemed dividend in terms of Section 2 (22) (e) of the Act of 1961 is not covered by the said provision. Obviously, the deemed dividend is included within the income by virtue of provisions of Section 2(24) of the Act of 1961 and therefore, unless and until it specifically falls within the exclusion as contemplated under the provisions of Section 10(34) read with Section 115-O, the same cannot be presumed to be excluded while computing the income of the recipient thereof. A bare perusal of Section 10(34) read with Section 115-O makes it a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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