TMI Blog2017 (8) TMI 408X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst revenue - I.T.A.No.226/Vizag/2015 - - - Dated:- 21-6-2017 - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER For The Appellant : Shri R. Govinda Rajan, DR For The Respondent : Shri G.V.N. Hari, AR ORDER PER D.S. SUNDER SINGH, Accountant Member: This appeal filed by the revenue against order of the CIT(A)- 3(I/C), Visakhapatnam, Camp: Hyderabad in ITA No.486/2013- 14/CIT(A)-3/Vizag/2014-15 dated 31.3.2015 for the A.Y. 2009-10. 2. All the grounds of appeal are related to the addition of ₹ 35 lakhs towards deemed dividend u/s 2(22)(e) of the Income Tax Act, 1961 (hereinafter called as the Act ). The assessee company engaged in the business activity of handling and transport contractors at Visakhapatnam and consignment agent at R.I.N.L., Nagpur. The assessee filed original return of income on 27.9.2009 declaring loss of ₹ 34,014/-. A search u/s 132 of the Act was conducted in the group of cases of M/s. Maha Maruthi Logistics Private Limited on 4.2.2010 and notice u/s 153A of the Act was issued to the assessee and the assessment was completed u/s 143(3) r.w.s. 153A of the Act. During the assessment procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and the payment made to the assessee company required to be brought to tax as deemed dividend in the hands of the assessee company within the meaning of section 2(22)(e) of income tax act. Accordingly, supported the order of the Ld. CIT(A). The Ld. D.R. has further argued that the Ld. CIT(A) has wrongly quashed the notice issued u/s 153A of the Act stating that there was no warrant issued in the name of the assessee company and he produced the copy of the warrant issued u/s 132 of the Act in the name of the assessee company. On the other hand, the Ld. A.R. relied on the orders of the CIT(A). 4. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The Ld. CIT(A) quashed the notice issued u/s 153A of the Act stating that there was no warrant executed in the name of the assessee. The Ld. D.R. placed the copy of the warrant executed against the assessee and the Ld. A.R. has not disputed the submissions made by the assessing officer. Hence, we set aside the order of the Ld. CIT(A) on this issue and hold that the notice issued u/s 153A of the Act is valid and accordingly, assessment was made validly u/s 143(3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rabad is reproduced as under: 11.1 The Hon'ble Delhi High Court in case of CIT Vs. Ankitech P. Ltd. (supra) while considering identical issue approved the decision of the ITAT, Mumbai Special Bench in case of Bhaumic Colours (P) Ltd., 313 ITR (AT) 146 and held as under: 22. Insofar as the provisions of Section 2(22)(e) are concerned, we have already extracted this provision and taken note of the conditions/requisites which are to be established for making provision applicable. In Commissioner of Income Tax Vs. C.P. Sarathy Mudaliar[1972] 83 ITR 170, the Supreme Court had traced out the assessee of this provision in the following manner: -Any payment by a company, not being a company in which the public are substantially interest, of any sum (whether as representing a part of the assets of the company or otherwise) made after 31.05.19987 by way of advance or loan. First limb a) to a shareholder, being a person who is the beneficial of shares (not being shares entit led to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power, Second limb b) or to my concern in which, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance. 25. Further, it is an admitted case that under normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under Section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to 'dividend'. Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fict ion does not extend to 'shareholder'. When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under Section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal f iction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to nonmembers. The second category specified under Sect ion 2(22)(e) of the Act, viz., a concern (like the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enlarged by any fict ion. 30. Before we part with, some comments are to be necessarily made by us. As pointed out above, it is not in dispute that the condit ions st ipulated in Section 2(22)(e) of the Act treating the loan and advance as deemed dividend are established in these cases. Therefore, it would always be open to the Revenue to take corrective measure by treating this dividend income at the hands of the shareholders and tax them accordingly. As otherwise, it would amount to escapement of income at the hands of those shareholders. 11.2 The same view has also been expressed by the Hon'ble Delhi High Court again in case of CIT Vs. Navyug Promoters P. Ltd. (203 Taxman 618) and Hon'ble Bombay High Court in case of CIT Vs. Universal Medicare (P) Ltd., (324 ITR 263). 11.3 The IT AT, Hyderabad Bench in case of MARC Manufacturers Pvt. Ltd. Vs. ACIT in ITA No. 555/Hyd/2008 dt. 31/08/2009 while considering ident ical issue of advancement of loan to one company, which is not a shareholder of the lender company following the decision ofM/s. ACE Tyres Limited, Bachupally, Ranga Reddy Districl ITAT Mumbai Special Bench in case of Bhaumik Colour P. Ltd. (supra) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of s. 2(22)(e) will not apply. 25. The new category of payment which was considered as dividend introduced by the Finance Act, 1987 w.e.f. 1st April, 1988 by the second limb of s. 2(22)(e) is payment to any concern in which such shareholder is a member or a partner and in which he has a substantial interest . It is this category of payment with which we are concerned in this reference. 26. The following conditions are required to be satisfied for application of the above category of payment to be regarded as dividend. They are : ( a) There must be a payment to a concern by a company. ( b) A person must be a shareholder of the company being a registered holder and 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. This is because of the expression such shareholder found in the relevant provision. This expression only refers to the shareholder referred to in the earlier part of s. 2(22)(e) viz., a registered and a beneficial holder of shares holding 10 per cent voting power. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... real. The beneficiary interest is called the beneficial interest. The trustee is to administer the property of another person but the ownership right in the trustee is to be used only on behalf of the real owner. As between trustee and third party ownership conferred on the trustee fictitiously by law prevails, i.e., the trustee is clothed with the rights of the beneficiary and is so enabled to personate or represent him in dealings with the world at large. The main purpose of trusteeship is to protect the rights and interest of person who for any reason are unable effectively to protect them for themselves. Such protection is required for four classes of people, (a) unborn persons; (b) infants, lunatics, or other disqualified persons; (c) a large number of persons who are interested in common; and (d) persons having conflicting interest in the same property, i.e., an owner and an encumbrancer or different kinds of encumbrances. Therefore, the first requirement of holding of shares both as a legal registered owner and beneficial owner of such shares is not satisfied in the case of the assessee. Therefore, provisions of s. 2(22)(e) would not be applicable at all to the case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Vikas Khurana 2 2% 4. Deshbandhu Khurana 25% 5. Shri Rajiv Khurana 25% The constitution of the firm Hotel Hilltop was as follows : 1. Shri Roop Kumar Khurana 45% 2. Shri Deshbandhu Khurana 55% The AO assessed the sum of ₹ 10 lakhs as deemed dividend under s. 2(22)(e) of the Act in the hands of the firm because the two partners of M/s Hotel Hilltop were holding shares by which they had 10 per cent voting power in M/s Hilltop Palace Hotel (P) Ltd. They were also entitled to 20 per cent of the income of the firm M/s Hotel Hilltop. Therefore the loan by M/s Hilltop Palace Hotels (P) Ltd. to the firm M/s Hotel Hilltop was treated as deemed dividend in the hands of M/s Hotel Hilltop, the firm under the second limb of s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to the Special Bench by holding 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 argument of the learned Departmental Representative that the Hon ble Rajasthan High Court did not deal with the second limb of s. 2(22)(e) of the Act is not correct. 33. We may also touch upon certain other aspects of the issue in the light of the submissions made before us. The Tribunal in the case of Nikko Technologies (I) (P) Ltd. (supra), while holding that the payment made by a company even to a nonshareholder can be brought to tax in the hands of the non-shareholder has made the following observations : 12........... Sec. 2(22)(e) only specifies the circumstances under which a payment by way of loan/advance is to be treated as deemed dividend. Once it is determined that any payment by way of loan/advance falls within the ambit of s. 2(22)(e), then, it has to be treated as dividend even though such payment in the ordinary circumstances may not be considered as dividend. At this point of time, role of s. 2(22)(e) ends. It nowhere provides as to who is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern. 36. The basis of bringing in the amendment to s. 2(22)(e) of the Act by the Finance Act, 1987 w.e.f 1st April, 1988 is to ensure that persons who control the affairs of a company as well as that of a firm can have the payment made to a concern from the company and the person who can control the affairs of the concern can draw 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 nonshareholder viz., concern. A loan or advance received by a concern is not in the nature of income. In other words, there is a deemed accrual of income even under s. 5(1)(b) in the hands of the shareholder only and not in the hands of the payee viz., non-shareholder (concern). Sec. 5(1)(a) contemplates that the receipt or deemed receipt should be in the nature of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pes of payments that may be regarded as dividend. The apex Court while considering what can come within the artificial definition of dividend under s. 2(22) in the case of CIT vs. Nalin Behari Lall Singha (1969) 74 ITR 849 (SC), described the scope of the definition of dividend thus- The definition is, it is true, an inclusive definition and a receipt by a shareholder which does not fall within the definition may possibly be regarded as dividend within the meaning of the Act unless the context negatives that view. The contention of the Departmental Representative that provisions of s. 8(a) of the Act create a fiction by which even payments to non-shareholders can be construed as dividend cannot be accepted. Those provisions merely fix the year in which dividend has to be taxed. It is therefore clear that the shareholder alone can, if at all, be subjected to tax for having earned dividend. 39. In the decision of the Tribunal in the case of Nikko Technologies (I) (P) Ltd. (supra), reliance has been placed on Circular No. 495, dt. 22nd Sept., 1987 which states as follows : Further deemed dividend would be taxable in the hands of the concern, where a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r fort ified by the fact that for deduction of tax at source. Sec. 194 provide that such deduct ion of tax has to be made in the case of the payments of the nature mentioned in clauses (a), (b), (c), (d) and (e) of sub section (22) of Sect ion 2 only in a case where such payments were made to a shareholder. Section 199 also indicates that adjustment of TDS would be provided in the assessment of shareholder only. The very fact that the provision for deduct ion of tax at source and adjustment of tax is only in respect of the payments to the' shareholder would clear ly indicate that even after the amendment, the effect of clause (e) of sub section (22) of Sec. 2 would apply only when the payment is made to shareholder. Wherever, the tax is to be deducted at source from a dividend or deemed dividend and the consequential effect of giving effect to such deduction of tax at source, etc., reference was made only to the payments to the shareholder. This would indicate clearly that clause (e) would apply only in case of payments to the shareholder and not to others. 11.6 In view of the foregoing discussion and following the special bench decision of Mumbai Tribunal in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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