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TMI Blog2017 (6) TMI 293X X X X Extracts X X X X X X X X Extracts X X X X ..... so noticed that another subsidiary company of the assessee by name M/s. Hooghly Mills Projects Ltd held 13,90,100 equity shares out of the total paid equity shares of 1,20,00,000/- of M/s. Mega Resources Ltd. The AO after making a reference to the pattern of share holding of the assessee and its subsidiary M/s. Hooghly Mills Projects Ltd., in share capital of M/s. Mega Resources Ltd concluded that the assessee held more than 10% of the voting power in M/s. Mega Resources Ltd,. and therefore the provision of section 2(22)(e) of the Act were attracted to the loan given by M/s. Mega Resources Ltd., to the assessee and the same was liable to be treated as deemed dividend and chargeable to tax in the hands of the assessee. Section 2(22)( e ) of the Act, lays down as follows: "Section 2(22) "dividend" includes- (a )to (d)****** (e )Any payment made 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) by way of advance or loan to a shareholder, being a person who has a substantial interest in the company, or any payment by any such company on behalf, or for the individua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (hereafter in this clause 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 holding not less than 10% of the Voting power to the extent to which the company in either case possesses accumulated profits." A perusal of the order of the AO shows that the AO has applied the first limb of Sec.2(22)( e) in the present case. 5. Aggrieved by the order of the AO, the Assessee preferred appeal before CIT(A). Before CIT(A) the Assessee contended that it is only shares held by the Assessee as a beneficial owner in the share capital of M/s. Mega Resources Ltd., which confers voting power in M/s. Mega Resources Ltd., that has to be considered and if done so, the voting power of the assessee was less than 10% in M/s. Mega Resources Ltd.. and therefore provision of section 2(22)(e) of the Act were attracted. The Assessee contended that the share holding of its subsidiary M/S.Hoogly Mills Projects Ltd., in the share capital of M/S.Mega Resources Ltd., is totally irrelevant for applying the provisions of Sec.2(22) ( e) of the Act. The CIT(A) agreed with the aforesaid submission of the Assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing not less than 10% of the voting power. But, in the present case, the assessee is not holding shares in excess of the prescribed limit; and consequently, the provisions of section 2(22)(e) are not applicable in the case of the assessee. In the case of Bhaumik Colour (P) Ltd 313 ITR (AT) 146, the Hon'ble Special Bench has held that section 2(22)(e) has created a fiction whereby the definition of "dividend" has been enlarged to include even loans and advances; and so, the legal provision has to be given a strict interpretation. Secondly, the definition of "dividend" as given in section 2(22)(e) is an. inclusive definition and the AO was not competent to en1arge the same by importing things which do not form part of such legal fiction. In view of the above, the AO was not justified in including the shareholding of the subsidiary company also for the purposes of invoking section 2(22)(e). The AO has not disputed the fact that the assessee company was having 1.7% share-holding in the lending company. As the assessee company was holding less than 10% of the voting power in the lending company, the provisions of section 2(22)(e) was not attracted in its case. I am of the considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and controversy surrounding the second limb, which is the subject matter of the SLP filed before the Hon'ble Supreme Court would be of no relevance to the present case. 9. In the case of ACIT Vs. Bhaumik Color Labs Pvt.Ltd., 118 ITD 1 (SB) (Mumbai), the Special Bench Mumbai had to deal with the following question: "Whether the words "such shareholder" occurring in section 2(22)(e ) refer to a shareholder who is both the 'registered' shareholder and the beneficial shareholder ?" It was held by the Special Bench as follows: "In view of the judgments of the Supreme Court in the cases of CIT v. C.P. Sarathy Mudalian [1972] 83 ITR 170 and Rameshwarlal Sanwarlal v. CIT [1980] 122 ITR 1/3 Taxman 1 (AP), it is clear that to attract the first limb of the provisions of section 2(22 )(e) the payment must be to a person who is a registered holder of shares. As already mentioned the condition under the 1922 Act and the 1961 Act regarding the payee being a shareholder remains the same and it is the condition that such shareholder should be beneficial owner of the shares and the percentage of voting power that such shareholder should hold has been prescribed as an additional condition under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holder of the shares held by M/S.Hoogly Mills Projects Ltd. We therefore uphold the order of CIT(A) and dismiss ground no.1 raised by the revenue. 11. Ground no.2 raised by the revenue reads as follows :- "2. That, on the facts and in the circumstances of the case, the CIT(A) is not justified in law in directing the A.O. to compute the disallowance under Rule 8D(iii) by restricting to those investments that have yielded tax free dividend income during the year." 12. The issue raised in ground no.2 is with regard to disallowance of expenses incurred in earning exempt income u/s 14A of the Act. The issue is only with regard to disallowance of other expenses which is covered by Rule 8D(2)(iii) of the Rules. According to the Assessee only other expenses of Rs. 20,000/- can be considered as one incurred in earning dividend income and only to that extent other expenses should be disallowed. The Assessee pointed out that while computing its total income it has already reduced expenses by Rs. 20,000/- in this regard and therefore no further disallowance of expenses u/s.14A of the Act should be made. The AO applied the provision of Rule 8D(2)(iii) of the Rules and made a disallowance of ..... 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