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TMI Blog2017 (11) TMI 1054X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee circumstantial evidence were not considered by the First Appellate Authority. Reliance was placed upon the decision of the Tribunal in the case of Income Tax Officer vs M/s Diamond Investment & Properties (ITA No. 5537/Mum/2009) order dated 29/07/2010. On the other hand, Shri Vimal Punamiya, ld. counsel for the assessee filed written submissions defending the conclusion drawn in the impugned order by explaining the facts. Reliance was placed upon the decision from Hon'ble Apex Court in the case of K. P. Verghese vs Income Tax Officer (1981) 7 taxman. 13(SC) by submitting that the factum of payment of cash as on money is upon the Revenue and the assessee has never accepted or tendered in the statement that cash money was transacted for purchase of the property. Our attention was invited to the factual finding recorded by the Ld. Commissioner of Income Tax (Appeal). Further, reliance was made upon the decision in the case of CIT vs Gulshan Kumar (2002) 257 ITR 703 (Del.), CIT vs P. V. Kalyansundaram (2007) 294 ITR 49 (SC), Dua Auto components Pvt. Ltd. (ITA No.4802/Del./2009), CIT vs Indication Instruments Ltd. (ITA NO.603/2011) and Pramod Pandey vs ACIT (ITA No.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Revenue and the burden so lies upon the Department was never discharged. In such a situation the ratio laid down by Hon'ble Apex Court in K. P. Verghese vs Income Tax Officer clearly supports the case of the assessee. The relevant portion from the aforesaid order is reproduced hereunder for ready reference:- "13. Thus, it is not enough to attract the applicability of sub-s. (2), that the fair market value of the capital asset transferred by the assessee as on the date of the transfer exceeds the full value of the consideration declared in respect of the transfer by not less than 15% of the value so declared, but it is furthermore necessary that the full value of the consideration in respect of the transfer is understated or, in other words, shown at a lesser figure than that actually received by the assessee. Sub-s. (2) has no application in the case of an honest and bona fide transaction where the consideration in respect of the transfer has been correctly declared or disclosed by the assessee, even if the condition of 15% difference between the fair market value of the capital asset as on the date of the transfer and the full value of the consideration declared by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive, namely, that he did not receive any consideration beyond that declared by him." The Hon'ble Apex Court finally held as under:- "The object of imposing the condition of difference of 15% or more between the fair market value of the capital asset and the consideration declared in respect of the transfer clearly is to save the assessee from the rigour of sub-s. (2) in marginal cases where difference in subjective valuation by different individuals may result in an apparent disparity between the fair market value and the declared consideration. It is a well-known fact borne out by practical experience that the determination of fair market value of a capital asset is generally a matter of estimate based to some extent on guess work and despite the utmost bona fides, the estimate of the fair market value is bound to vary from individual to individual. It is obvious that if the restrictive condition of a difference of 15% or more between the fair market value of the capital asset as on the date of the transfer and the consideration declared in respect of the transfer were not provided in sub-s. (2), many marginal cases would, having regard to the possibility of difference of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t., 1998 purchased certain land at Brindavan Road, Fairlands, Salem for a sum of Rs. 4.10 lakhs. During a search of the office and residential premises of Polimer Net Work, certain notes on loose sheets allegedly in the hands of the respondent were found and seized by the Department. In his statement recorded on 8th Dec., 1998, the assessee submitted that he could not remember as to why the notings had been made. The statement was further confirmed by another statement on 11th Dec., 1998. The Department also recorded the statement of the vendor Rajarathinam on 8th Dec., 1998 which too was confirmed on 11th Dec., 1998 in which he admitted that he had in fact received a total consideration of Rs. 34.35 lakhs and that the sum of Rs. 4.10 lakhs reflected in the sale deed had been received by him by way of a demand draft and the balance in cash. Rajarathinam however retracted from his statement on 8th Jan., 1999 and filed an affidavit deposing that the sale price was Rs. 4.10 lakhs only and that his statements earlier given to the authorities were incorrect. In a subsequent statement recorded on 20th Nov., 2000 Rajarathinam again reverted to his earlier portion and deposed that the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what has been declared ? (b) When the assessee did not give any explanation to the notings found and at the same time the Revenue is able to corroborate the same with the statement of the seller for the purpose of determination of actual sale value, would the lower authority be justified in interfering with the same ? (c) When consistent sworn (statements) were taken into consideration along with evidences found at the time of search, would (they) all be liable to be rejected on the basis of one statement in between contradicting the earlier ones which was also explained away as a result of intimidation ? 4. The High Court relying heavily on the order of the CIT and the Tribunal held that no substantial questions of law had been raised and accordingly dismissed the appeal. It is this situation that the present matter is here before us. 5. Mr. G.N. Vahanvati, the learned Solicitor General has at the very outset raised serious objection to the order of the High Court pointing out that Division Bench had merely plagiarized substantial portions from the order of the CIT and Tribunal in arriving at its conclusion and no independent assessment on the questions of law that ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT vs Prem Prakash Nagpal (ITA No.570 of 2012), Pramod Pandey vs ACIT (ITA NO.1295/Del./2012), CIT vs Vishal Rubber Products (2004) 136 taxman 151 (P & H). The relevant portion from the order from Hon'ble Punajab Haryana High Court is reproduced hereunder for ready reference:- "5. We have heard Dr. N.L. Sharda and perused the record. A reading of the order Annerure A2 passed by the CIT(A), Jalandhar, shows that while deleting the additions made by the AO, he made the following observations : "On merits however I find substantial force in the submissions of the appellant because no material could be found by the learned Asstt. CIT to corroborate the entries made in the impugned balance sheet. Neither it is supported by the entries in the books of account of the three partnership firms nor by any other material. It could not be established that the impugned balance sheet found in the course of the search from the residential premises of Shri O.P. Sehgal is a genuine balance sheet because no other evidence could be found like account books or any other material from where the balance sheet has been withdrawn. No addition therefore, can be made in the hands of the firms on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n record. Therefore, we do not find any merit in the appeal and dismiss the same." 2.7. In another case of CIT vs Shivakaami Co. Pvt. Ltd. (1986) 25 taxman 80K (SC) (1986) 52 CTR 0108 : (1986) 159 ITR 0071, the Hon'ble Apex Court observed/held as under:- "The onus was on the Revenue to prove that there was understatement in the document not that the goods were sold at undervalue. Understatement of a value is a mis-statement of value. Selling goods at an undervalue to defeat Revenue is different from understating the value in the document of sale. The proviso to s. 12B(2) of 1922 Act provides 'full value of the consideration for which the sale, exchange, relinquishment or transfer is made' to be taken as the basis for the computation of the capital gains. Therefore, unless there is evidence that more than what was stated was received, no higher price can be taken to be the basis for computation of capital gains. The onus is on the Revenue-the inference might be drawn in certain cases but to come to a conclusion that a particular higher amount was in fact received must be based on such material from which such an irresistible conclusion follows. In the instant case, no su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under s. 260A of IT Act, 1961 (for brevity "Act, 1961") challenging the order dt. 11th Sept., 2009 passed by the Income-tax Appellate Tribunal (in short "Tribunal") in ITA No. 66/Del/2001, for the block period 1st April, 1988 to 20th Aug., 1998. 2. Briefly stated the relevant facts of the case are that the respondentassessee had made investment in two plots of agricultural land in December, 1996. The investment in the farm houses were made by the assessee in the name of his father, namely, Mr. L.D. Gera for a total consideration of Rs. 41,35,700. The abovesaid properties were brought from Sam Aviation (P) Ltd. of which the assessee was one of the directors. It is an admitted fact that the sources and the investment made thereof in these two plots had been declared by the respondentassessee under Voluntary Disclosure of Income Scheme, 1997 (for short "VDIS"). On 20th Aug., 1998, a search and seizure under s. 132 of Act, 1961 was carried out at both the respondent assessee's residential and business premises. The sale deeds of the abovesaid properties were found during the search. 3. The AO referred the properties for valuation to the District Valuation Officer (in short " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DVO's report could not be sustained as no adverse material had been found during the search. She also relied upon the Supreme Court's decision in CIT vs. Mukundray K. Shah (2007) 209 CTR (SC) 97 : (2007) 290 ITR 433 (SC) to contend that the block assessment of undisclosed income can be based on the evidence found in the search and/or material or information gathered in post-search inquiries made on the basis of evidence found in the search. 6. Mr. Piyush Kaushik, learned counsel for the respondent-assessee contended that no addition could be made by AO in the absence of any incriminating evidence found during the search. He submitted that no adverse material was found during the search which could show that respondent-assessee had made more investment in the property than what had been declared in the sale deed and consequently, no reference could be made to the DVO. 7. Mr. Kaushik further submitted that the reference to the Valuation Officer and consequent addition made on the basis of said Valuation Officer's report is itself bad in law as the proviso to s. 142A of Act, 1961 itself stipulates that the said section does not apply in respect of assessments made o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent with the submission made by Mr. Kaushik the proviso to s. 142A of the Act, 1961, has no retrospective effect. The relevant extract of s. 142A of the Act, 1961 reads as under : "142A. Estimate by Valuation Officer in certain cases.-(1) For the purposes of making an assessment or reassessment under this Act, where an estimate of the value of any investment referred to in s. 69 or s. 69B or the value of any bullion, jewellery or other valuable article referred to in s. 69A or s. 69B or fair market value of any property referred to in sub-s. (2) of s. 56 is required to be made, the AO may require the Valuation Officer to make an estimate of such value and report the same to him. (2) ....... (3) ....... Provided that nothing contained in this section shall apply in respect of an assessment made on or before the 30th Sept., 2004, and where such assessment has become final and conclusive on or before that date, except in cases where a reassessment is required to be made in accordance with the provisions of s. 153A." (Emphasis, italicized in print, supplied) 12. It is pertinent to mention here that the assessment was made by the AO on 30th Aug., 2000 and the CIT(A) de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressed or ignorance with regard to details of land dealings as has been alleged. The efforts of Assessing Officer to record the statement of Miss Damini Vadhwa, and Miss Reeta Bhatia also could not provide any information leading to the addition. The seized material/print out was not in the handwriting of the assessee and even there is no material to suggest that the seized material was maintained either by the assessee or it's of or employees. Even the statement of Rajaratanam was discarded by the Ld. Commissioner of Income Tax (Appeal) as the floor price, fixed by the authorities, for such property was found much lower than the value. Considering the factual matrix and the judicial pronouncements, discussed hereinabove, we find no infirmity in the conclusion of the Ld. First Appellate Authority. Our view is further fortified by the fact that the concerned data was even not found from the premises of the assessee and further the assessee has not started any substantial business activity and for acquisition of the land to inter corporate loan of Rs. 40 lakh from Strategic Capital Corporation. Thus, the presumption of the Ld. Assessing Officer for making the addition on presumptive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te limited company therefore the provision is not applicable. However, the Ld. Assessing Officer assessed Rs. 40 lakh as deemed dividend on the plea that the common directors hold more than 10% share holding even though the assessee is not registered share holder of the company. Before adverting further, we are expected to analyze section 2(22)(e) of the Act, which is reproduced hereunder for ready reference:- "2(22)(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 loan9 to a shareholder9, 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 ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought to have been received as an advance or loan from a company to a concern in which the shareholder had substantial interest. This condition, according to the assessee, was not met since the amount was neither 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 s. 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 AO came to the conclusion that the provisions of s. 2(22)(e) are attracted the moment a loan or advance is made and the subsequent defalcation of funds was immaterial. The AO 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 diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 s. 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 are substantially interested of any sum, whether as representing a part of the assets of the company or otherwise made after the 31st 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 individual b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch are spelt out in the provision. Similarly, a payment made by a company on behalf, or for the individual benefit, of any such shareholder is treated by cl. (e) to be included in the expression 'dividend'. Consequently, the effect of cl. (e) of s. 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 Rs. 32,00,000 is that there was a dividend under s. 2(22)(e) and no other basis has been suggested in the order of the AO. 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 3.5. If the facts and the ratio laid down in the aforesaid case are analyzed with the facts of the present appeal, the first requirement of section (2(22)(e) of there being and advance or loan was not fulfilled and even assuming that it was a dividend, it has to be taxed in the hands of the shareholders and not in the hands of the assessee. The ratio laid down in CIT vs Impact Containers Pvt. Ltd. (2014) 48 taxman.com 294 (Bom.); 367 ITR 346 (Bom.), wherein, certain companies advance money to the assessee company in which one director of the assessee was holding more than 10% of equity shares and since the assessee itself was not the shareholder of those lending companies, the addition made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of this clause namely clause (a) "concern" means a Hindu undivided family or a firm or an association of persons or a body of individuals or a company. The explanation also states and explains that a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than 20% of income of such concern. 17. We would, for the sake of appreciation of the rival contentions note the facts in the Appeal which is styled as Income Tax Appeal No.114 of 2012. There, return of income was filed by the assessee declaring total income of Rs. 3,77,11,467/. The return was processed under Section 143(1) of the I. T. Act. The assessment was subsequently rectified determining the assessed income at Rs. 3,32,31,204/ . The case was selected for scrutiny. The assessee company is engaged in the business of manufacture and sale of printed Aluminum Collapsible Tubes and Auxiliary Machine used in manufacture of tube. What is relevant and material for our purpose is disallowance under Section 2(22)(e) of the I. T. Act. During the assessment year under consideration namely 20062007, credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shareholder, deserves acceptance. That is how paragraph nos.6.3 and 6.4 of the order of the Commissioner would read. In coming to this conclusion, he relied upon the order of the special bench of the Tribunal in the case of Assistant Commissioner of Income Tax v/s Bhaumik Colour Pvt Ltd. 19. The result of this discussion was that the Commissioner of Income Tax(Appeals) partly allowed the Appeal of the assessee. 20. The Deputy Commissioner of Income Tax(Revenue) carried the matter in Appeal. The Income Tax Appellate Tribunal, in Income Tax Appeal No.1597 of Mum/2010 and in dealing with this ground, in paragraph no.6 of the order dated 13th April 2011, held as under: "The second ground is that the CIT(A) erred in deleting the addition of Rs. 96,16,924/ made under section 2(22) (e) of the Income Tax Act, 1961. On this point there is an order of the Tribunal in the case of DCIT v/s M/s. Patel Aluminium Pvt Ltd in ITA No.1598/Mum/2010 dated 19.01.2011. The controversy in this case was whether an addition for deemed dividend can be made in the hands of the recipient of the amount even though he is not a shareholder of the lender company. It was held, following the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Universal Medicare (supra). 23. Thereafter, the Tribunal's findings have been referred to at page no.267 of the report. In paragraph no.7, the Division Bench referred to the definition of the term "dividend" as appearing in the I. T. Act and which we have reproduced above, and then held as under: "The Tribunal in Appeal has reversed the findings of the Commissioner of Income Tax (Appeals) on two counts. Firstly, the Tribunal held that the provisions of Section 2(22)(e) would be attracted if a loan was taken by the shareholder from any closely held company. In the present case, the Tribunal noted that the amount was part of a fraud committed on the assessee and the transaction was not reflected in its books of account. In the circumstances, Section 2(22)(e) was held not to apply. Secondly, the Tribunal held that even otherwise, the amount would have to be taxed in the hands of the shareholder who obtained the benefit and not in the hands of the assessee. 7. Under Section 56, income of every kind which is not to be excluded from the total income under the Act is chargeable to income tax under the head income from other sources, if it is not chargeable to income tax un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'dividend', Clause 2(22) brings within its purview items which may not ordinarily constitute the payment of dividend. Parliament has expanded the ambit of the expression 'dividend' by providing an inclusive definition. 9. In order that the first part of Clause (e) of Section 2(22) is attracted, the payment by a company has to be by way of an advance or loan. The advance or loan has to be made, as the case may be, either to a shareholder, being a beneficial owner holding not less than ten per cent of the voting power or to any concern to which such a shareholder is a member or a partner and in which he has a substantial interest. The Tribunal in the present case has found that as a matter of fact no loan or advance was granted to the assessee, since the amount in question had actually been defalcated and was not reflected in the books of account of the assessee. The fact that there was a defalcation seems to have been accepted since this amount was allowed as a business loss during the course of assessment year 20062007. Consequently, according to the Tribunal the first requirement of there being an advance or loan was not fulfilled. In our view, the finding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erely an observation or in the nature of obiter dictum and that cannot be said to be the ratio of the judgment is the first contention before us. We are unable to accept this contention for more than one reason. The Universal Medicare's case also was a Revenue's appeal. In Universal Medicare, the Court was dealing with three questions termed as substantial questions of law on behalf of the Revenue. The Revenue specifically urged that the Tribunal's findings on the first as well as the second aspect are erroneous and raised substantial questions of law. It was contended that the Tribunal could not have arrived at a factual conclusion that Section 2 (22) (e) could not be attracted. If a loan was taken by a shareholder from any closely held company and findings of fact are that the amount was a part of the fraud committed on the assessee and the transaction was not reflected in its books of accounts would not mean that Section 2(22)(e) is not applicable or attracted. The Tribunal held that it does not apply in the light of such factual position. However, it was also urged that the Tribunal's second conclusion that even if the factual aspect denotes payment within the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for interpretation again. The Court will have to bear in mind that the legislature stepped in to amend the subclause with some definite intent and purpose. The purpose was not to allow circumvention or bye passing a statute like the I. T. Act 1961. Therefore, any reference to the position of the shareholders/members of a company as is to be found in the Indian Company Act, 1956 is wholly unwarranted and uncalled for. The words "shareholder being a person who is the beneficial owner of the assessee", therefore, must receive an interpretation in consonance with the legislative intent. That being not to restrict it to a shareholder registered as such, that we will have to take a second look at the view taken by this Court in Universal (supra). This argument is opposed by the counsel of the assessee by pointing out not only the judgment in the Universal Medicare takes care of all these aspects but interpretation placed on the provision in that judgment has found favour with several High Courts and the leading judgment of the Delhi High Court which follows the view taken in Universal Medicare is relied upon. 27. We have perused the provision carefully and equally the judgment in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e definition came to be broadly worded by indicating therein the reference to any concern. Equally, any payment made by such company on behalf of the shareholder or for individual benefit of any shareholder to the extent to which the company in other case possesses accumulated profits has also been brought in. Thus, in addition to distribution of accumulated profit, debenture stock or deposit certificate etc, a payment of the aforesaid nature has been termed as "dividend" and included in the definition. At the same time, the legislature has taken care not to include any advance or loan made to a shareholder or the said concern in which such shareholder is a member or a partner and in which he has substantial interest in the ordinary course of the business of the company and where lending of money is substantial part of the business of the company. Equally, any dividend paid by the company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of subclause (e), to the extent to which it is so set off, is also excluded advisedly. 29. We are also of the opinion that any reference to Explanation 3 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 70(SC) held that the beneficial owner of shares whose name does not appear in the register of the shareholders of the company cannot be said to be a shareholder though he may be beneficially entitled to the shares but he is not a shareholder. Mr. Gupta, appearing before us for the Revenue would submit that much water has flown after the decision in the case of Rameshwarlal and C. P. Sarathy(supra) because the provision has been amended since then. The fiction therefore must be carried to its logical end and its purpose should not be defeated by narrow construction as was placed on the provision prior to its amendment. In other words, the amendment was brought in only because of such view having taken earlier, is his submission. 32. We are unable to accept it because of the consistent view taken and that even if the words as noted by us hereinabove have been inserted in the definition so as to make reference to the beneficial owner of the shares, still the definition essentially covers the payment to the shareholder and the position of the shareholder as noted in the Supreme Court's decision, cannot undergo any change. That legal position and status of the shareholder being t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd purpose of the legislature in enacting it. The view taken by the Delhi High Court in the Commissioner of Income Tax v/s Ankitech Pvt Ltd (supra) has thus our respectful concurrence. 34. We do not make reference to the other judgments because this line of reasoning has been followed in the same. It is not necessary to multiply our judgment by making reference to each of the orders following the judgment in Ankitech Pvt Ltd and rendered by Delhi High Court or by the Allahabad High Court and Gujrat High Court. 35. We are of the view that so long as the Tribunal in the matters and the Appeals which are brought before us holds that the assessee company before it was not a shareholder in any of the entities which have advanced and lent sums, then, the addition is required to be deleted and following the judgment in Universal Medicare(supra) of this Court. Such a view taken in the present case by the Tribunal, therefore, cannot be termed as perverse or vitiated by any error of law apparent on the face of record. The Appeal, therefore, does not raise any substantial question of law. 36. Our judgment passed today, shall cover all such cases in which recipient is not shareholder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier years as well as in the financial year 1999- 2000 and, therefore, there was no motive in the debtor companies repaying their debts to MKF and MKI. According to CIT(A), merely because repayments were made by MKSEPL and SCPL through MKF and MKI in January/February, 2000 and merely because the said amounts were partly utilized by the said two firms in making payments to the assessee who bought 9% RBI Relief Bonds therefrom, did not necessarily mean that the assessee had routed the funds of MKSEPL through MKF and MKI for his individual benefit. According to CIT(A), MKF and MKI were two separate entities; that there was no material to show that MKF and MKI were used as conduits for routing the money from MKSEPL to the assessee. According to CIT(A), while the total investment made by the assessee in purchase of Bonds during financial year 1999-2000 was Rs. 26.35 crores, the Department has sought to assess only Rs. 5.99 crores as deemed dividend and, therefore, according to CIT, the allegation made by the AO was baseless. According to CIT(A) there was no material to show that MKSEPL and SCPL had made payments to the said two firms for the benefit of the assessee enabling him to pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght in restricting the deemed dividend amount to Rs. 5.99 crores since known company sources had to be eliminated. According to the Tribunal, the AO was right in identifying MKSEPL as the originating company, the identity of the ultimate beneficiary, the amount to be taxed, that is, Rs. 5.99 crores and the sufficiency of accumulated profits of MKSEPL in which the assessee had more than 10 per cent voting power. Accordingly the Tribunal allowed the Department's appeal. 5. Aggrieved by the decision of the Tribunal dt. 28th Jan., 2005, the assessee carried the matter in appeal to the High Court under s. 260A of the said Act. By the impugned judgment the High Court held in favour of the assessee on two counts. According to the High Court, the assessee had declared the primary facts in the returns. According to the High Court, the present case did not fall under Chapter XIV-B of the said Act. According to the High Court, this was not the case of undisclosed income. According to the High Court, this was a matter of regular assessment. According to the High Court, none of the authorities below have held that the entries in the books of accounts were fictitious. According to the High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and tax records even before the search; that no incriminating document or evidence was found by the Department during the search which falsify such transactions entered into by the assessee in the normal course; that the expression "undisclosed income" has been defined in s. 158B(b) of the said Act and since block assessment was relatable to such evidence recovered during search in the present case s. 158BB(1) was not applicable in this case since no such evidence was recovered during the search. Learned counsel submitted that Chapter XIV-B was put on the statute book to enable assessment of undisclosed income detected on evidence found during the search. According to the learned counsel, the block assessment was intended to be an assessment in addition to the regular assessment. Learned counsel submitted that in the present case for want of such evidence, the Department was not entitled to make additions on account of deemed dividend to the tune of Rs. 5.99 crores. During the search, according to the learned counsel, nothing except a cash flow chart giving details of investments made by the assessee in purchase of the said Bonds of the value of Rs. 26.35 crores was furnished. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repaid Rs. 2.79 crores to MKI which were not on behalf of or for the benefit of the assessee. It was urged that MKI had never borrowed money from SCPL at any time. Learned counsel urged that the Tribunal was wrong in holding that the fact that MKI had never borrowed money from SCPL, was irrelevant. Learned counsel urged that Rs. 2.79 crores were withdrawn by the assessee from his firm styled MKI on 28th Jan., 2000 and such withdrawal was debited by MKI to the capital account of the assessee. It was urged that MKSEPL had borrowed substantial amounts from MKF; and MKSEPL had made repayments to MKF during the financial year 1999-2000 against the earlier debt owed by MKSEPL to MKF. Learned counsel submitted that the assessee had a credit balance of Rs. 6.72 crores in his capital account standing in the books of partnership firm of MKF as on 1st April, 1999. Learned counsel urged that the withdrawals made by the assessee from MKF were only out of his capital account with MKF and that the said withdrawals were debited by MKF to the capital account of the assessee. Learned counsel further urged that there was no evidence on record to show that payments by SCPL to MKI and/or the payment by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was wrong in treating the accumulated profits of MKSEPL as accumulated profits of SCPL merely because the merger became effective retrospectively w.e.f. 18th May, 1998. 9. We find merit in this civil appeal. The companies having accumulated profits and the companies in which substantial voting power lies in the hands of the person other than the public (controlled companies) are required to distribute accumulated profits as dividends to the shareholders. In such companies, the controlling group can do what it likes with the management of the company, its affairs and its profits. It is for this group to decide whether the profits should be distributed as dividends or not. The declaration of dividend is entirely within the discretion of this group. Therefore, the legislature realized that though funds were available with the company in the form of profits, the controlling group refused to distribute accumulated profits as dividends to the shareholders but adopted the device of advancing the said profits by way of loan to one of its shareholders so as to avoid payment of tax on accumulated profits. This was the main reason for enacting s. 2(22)(e) of the Act. 10. In the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO and by the Tribunal remains unchallenged. Lastly, on the maintainability of the block assessment, we are of the view that the Department was right in assessing the said amount as deemed dividend in the hands of the assessee under s. 2(22)(e) of the Act. The impugned assessment order was passed under s. 158BC. That assessment originated on account of a search conducted under s. 132(1) of the Act. In that search the diary "ML-20" was identified. That identification was the starting point of connected enquiries resulting in the detection of undisclosed income of Rs. 5.99 crores. In other words, undisclosed income, in the nature of deemed dividend, did not arise from any scrutiny proceedings, tax evasion petitions, surveys, information received from external agency, etc. The undisclosed income was detected by the AO wholly and exclusively as a result of a search and, therefore, the Department was right in invoking the provisions of Chapter XIV-B. There is one more aspect in this regard. From the facts, indicated above, the Department has established a sort of circular trading in this case. One of the important features of circular trading is to route the funds through conduits. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int, supplied) We also quote hereinbelow para 19 and para 21 of the judgment of the Bombay High Court in the case of CIT vs. P.K. Badiani (1970) 76 ITR 369 (Bom) : "19. Now, the assessee's account for 1st April, 1957, to 31st March, 1958, shows that there are credits as well as debits. What has to be ascertained is whether the debits are 'loans', so that they can be deemed as dividends. The account is a mutual, open, and current account. Every debit, i.e., every payment by the company to the assessee, may not be a loan. To be treated as a loan, every amount paid must make the company a creditor of the assessee for that amount. If, however, at the time when the payment is made by the company is already a debtor of the assessee, the payment would be merely a repayment by the company towards its already existing debt. It would be a loan by the company only if the payment exceeds the amount of its already existing debt and that too only to the extent of the excess. Therefore, the position as regards each debit will have to be individually considered, because it may or may not be a loan. The two basic principles are, that only a loan, which would include the other payments mention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and MKI was for the benefit of the assessee. This was a finding of fact. It was not perverse. Therefore, the High Court should not have interfered with the said finding. Further, the above two judgments lay down that the concept of deemed dividend under s. 2(22)(e) of the Act postulates two factors, namely, whether payment is a loan and whether on the date of payment there existed "accumulated profits". These two factors have to be correlated. This correlation has been done by the Tribunal coupled with the fact that all withdrawals were debited in the capital account of the firm leading to the debit balance of Rs. 8.18 crores. The High Court has erred in disturbing the findings of fact. 14. For the above reasons, we set aside the impugned judgment of the High Court. Accordingly, the appeal stands allowed with no order as to costs." 3.7. If the judicial pronouncements are analyzed with the facts of the present appeal, the addition made by the Assessing Officer is on the assumption that the common director hold more than 10% in SCCPL, which is factually incorrect. Both companies have common directory namely Shri Atul Sud, who is having 9% stakes in SCCPL (sister concern) which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (e) of section 2(22) must be given a strict interpretation. In the instant case, there was no dispute that the companies which gave the loan or advance were one in which public was not substantially interested. Nor was there any dispute that these companies possessed accumulated profits to the extent of the loan or advance. [Para 19] 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 the 1961 Act. The word 'Shareholder' alone existed in the definition of dividend in the 1922 Act. The expression 'Shareholder' has been interpreted under the 1922 Act to mean a registered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a member or a partner and in which he has a substantial interest'. [Para 25] The following conditions are required to be satisfied for application of the above category of payment to be regarded as dividend : (a) There must be a payment to a concern by a company. (b) A person must be 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 section 2(22 )(e), viz., a registered and a beneficial holder of shares holding 10 per cent 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 per cent of the income of such concern; and where the concern is a company he must be the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idend as introduced by the Finance Act, 1987 with effect from 1-4-1988, viz., payment by a company 'to any concern in which such shareholder is a member or a partner and in which he has a substantial interest' do not say as to in whose hands the dividend has to be brought to tax, whether in the hands of the 'concern' or the 'shareholder'. [Para 30] The intention behind enacting provisions of section 2(22 )(e) are that closely held companies (i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distri-buted the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary and natural meaning of the word 'Dividend' is altered. To this extent the definition of the term 'Dividend' can be said to operate. If the definition of 'Dividend' is extended to a loan or advance to a non-shareholder, the ordinary and natural meaning of the word 'dividend' is taken away. In the light of the intention behind the provisions of section 2(22)(e ) and in the absence of indication in section 2(22)(e ) to extend the legal fiction to a case of loan or advance to a non-shareholder also, the loan or advance to a nonshareholder cannot be taxed as deemed dividend in the hands of a non-shareholder. [Para 37] The basic characteristic of dividend is a share of profits of the company given to its shareholders. Further, section 206 of the Companies Act, 1956 prohibits payment of dividend to any person other than the registered shareholder. If one was to break up the natural meaning the following components emerge (a) dividend is a share of profits of the company (b) paid to its shareholders. Section 2(22) artificially extends the scope of dividend from being more than only a distribution of profits to cover certain other types of disbursements such as loans paid etc. (the f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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