TMI Blog2017 (11) TMI 1054X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the transaction to be made through demand draft but he never tendered that any cash was transacted. Ms. Zaver Cyrus Dadina completely expressed 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 lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts/evidences received from DRI, Mumbai as the assessee was unable to explain the transaction or rebut the presumption that on money was paid for the purchase of the property. 2. During hearing, the ld. DR, Shri V. Justin, advanced arguments, which is identical to the ground raised by submitting that no explanation was adduced by the assessee with respect to cash portion and merely claimed that money was paid through demand draft. It was contended that while granting relief 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t seems that the whole addition was made by the Assessing Officer on the basis of information received from the investigation wing and was purely based upon presumption, because, no documentary evidence was brought on record substantiating that any cash was transacted in the purchase. The information received by the Assessing Officer was expected to be corroborated with evidence. It is an established law that the conditions of taxability or the presumption of on money transaction has to be proved 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 consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f law that the onus of establishing that the conditions of taxability are fulfilled is always on the Revenue and the second condition being as much a condition of taxability as the first, the burden lies on the Revenue to show that there is an understatement of the consideration and the second condition is fulfilled. Moreover, to throw the burden of showing that there is no understatement of the consideration, on the assessee would be to cast an almost impossible burden upon him to establish a negative, 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 gener ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or the assessee received anything directly or indirectly over and the above the declared value. Thus, the decision from the Hon'ble Delhi High Court and the ratio laid down therein CIT vs Gulshan Kumar (2002) 257 ITR 703 (Del.) comes to the rescue of the assessee. Identical ratio was laid down by Hon'ble Apex Court in CIT vs P. V. Kalyansundaram (2007) 294 ITR 49 (SC). The relevant portion from the order is reproduced hereunder:- 3. The respondent assessee vide a registered sale deed dt. 26th Oct., 1998 purchased certain land at Brindavan Road, Fairlands, Salem for a sum of ₹ 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 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and to escape a much higher liability to the payment of tax on undisclosed income should proceedings under s. 158BD of the Act be initiated. On these findings, the Tribunal dismissed the appeal. It is in these circumstances that an appeal under s. 260A was filed in the High Court. Before the High Court the following substantial questions of law were raised : ( a) Whether or not when the returns and the statements of the seller admit higher sale consideration actually received, the Revenue is justified in fixing the sale consideration at the higher amount than 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 intimidatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... questions of fact. We therefore find no infirmity in the order of the High Court. Accordingly, we dismiss the appeal. 2.5. In the aforesaid case, there were allegation of on money transaction, on the basis of non-convincing loose seats found during the course of search and conflicting statement of the seller. The addition was deleted by the Tribunal which was affirmed by Hon'ble High Court and Hon'ble Apex Court. 2.6. Identical ration was laid down in the case of Dua Auto Components Pvt. Ltd. (ITA No.4802/Del/2009), CIT vs Indication Instruments Ltd. (ITA NO.603 of 2011), CIT 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material adverse to the assessee. In the circumstances the additions made on the basis of the impugned balance sheet cannot be sustained and accordingly the addition of ₹ 7,16,322 (1,54,879 + 4,32,702 + 1,28,741) is hereby deleted. Since the entire addition made is deleted, the other grounds in the appeal become infructuous. 6. Learned counsel for the Revenue could not point out any patent error in the reasons assigned by the CIT(A) which were approved by the Tribunal. The finding recorded by the AO that the assessee had concealed the income is not supported by any tangible evidence available on 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable only where the full value for the consideration has not been stated. There is no evidence, direct or inferential, in these cases that the full consideration had not been stated in the document. Capital gains tax was not, therefore, taxable on the present case.-K.P. Vargese vs. ITO Anr. (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) : TC22R.105 followed; Shivakami Co. (P) Ltd. Ors. vs. CIT (1973) 88 ITR 311 (Mad) : TC22R.151 affirmed on different grounds. 2.8. Likewise, Hon'ble Delhi High Court in CIT vs Navi Gera (2010) 328 ITR 516 (Del.) held as under:- The present appeal has been filed 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 ₹ 41,35,700. The abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee before the Department in VDIS, 1997 and in the absence of any adverse material found in the course of search, the addition made by the AO in the present case, on the basis of valuation report of DVO cannot be sustained in the absence of any adverse material found in the course of search. We, therefore, decline to interfere in the order of the learned CIT(A) on this issue. ( Emphasis, italicized in print, supplied) 5. Ms. Suruchii Aggarwal, learned counsel for the Revenue submitted that both CIT(A) and Tribunal have erred in law in deleting the addition of ₹ 2,24,08,820 made by the AO on the ground that addition based on 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 contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2006) 200 CTR (Del) 327 : (2006) 287 ITR 285 (Del)]. 10. Further, the reliance of learned counsel for the Revenue on the Supreme Court's decision in Mukundray K. Shah (supra) is misplaced. In the said case, the entire picture regarding the working of circular trading became apparent only after seeing the cash flow statement which emerged in the inquiry conducted by the Department on the basis of evidence found during the search. In the present case, since the details of the properties had already been disclosed under VDIS, it cannot be said that the Department came in possession of any information which it did not possess earlier. 11. We are further in agreement 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 valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is further fortified by the facts that the demand drafts issued for purchase of property were reflected in the documents, no statement was recorded by DRI either of Ms. Zaver Cyrus Dadina or of any other person during the course of search in respect of the details contained in the hard disc. Even, the information received from the investigation wing was never corroborated with any evidence, statement that any cash changed hands for the transaction. When the Ld. Assessing Officer recorded the statement of Shri Atul Sud, Director of the assessee company, though he admitted the transaction to be made through demand draft but he never tendered that any cash was transacted. Ms. Zaver Cyrus Dadina completely expressed 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 Rajaratan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Ld. DR, relied upon the decision in the case of Gopal Sons (HUF) vs CIT (Civil Appeal No. 12274 of 2016) (arising out of SLP(c) No.22059 of 2015). 3.2. We have considered the rival submissions and perused the material available on record. The facts, brief, are that the assessee was incorporated and was not having any business, borrowed loan of ₹ 40 lakh on 17/01/2006. The assessee repaid the borrowed funds. During reassessment proceedings, applied section 2(22)(e) of the Act on the funds acquired by the assessee from SCCPL. The assessee vide letter dated 11/12/2013 explained that the provision of the deem dividend is not attracted and further vide letter dated 30/01/2014 asserted that the trust is not a private limited company therefore the provision is not applicable. However, the Ld. Assessing Officer assessed ₹ 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 bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 32,00,000 was transferred from the bank account of a company by the name of Capsulation Services (P) Ltd. (CSPL) to the account of the assessee maintained in the Chembur Branch of the SBI. Mr. Vikram Tannan was a director of CSPL. He held over 10 per cent of the equity capital of CSPL and over 20 per cent of the equity capital of the assessee. The AO, in the course of the order of assessment, relied on the provisions of s. 2(22)(e) and treated the amount of ₹ 35,00,000 as deemed dividend in the hands of the assessee and directed that the amount be added back to its total income. The assessee contended that one Mr. Teredesai, Vice President (Finance) had misappropriated large sums of money by opening bank accounts and the transaction by which an amount of ₹ 32,00,000 was transferred from CSPL was part of the misappropriation. According to the assessee, the amount was not reflected in the books of the assessee since it had been misappropriated by the Vice President (Finance). The fact that the amount has been defalcated could not, according to the assessee, be disputed in view of the fact that it has been allowed by the AO as a business loss during the asst. yr. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(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 s. 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 under any of the heads specified in items (a) to (e) of s. 14. Under cl. (1) of sub-s. (2), income by way of dividend is chargeable to income-tax under the head 'Income from other sources'. Sec. 2(22) provides an inclusive definition of the expression 'dividend' for the purposes of the Act. Sec. 2(22)(e) is as follows : ( 22) dividend includes- ( a) to (d) ........... ( e) any payment by a company, not being a company in which the public are substantially interested, or any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranted 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 asst. yr. 2006-07. Consequently, according to the Tribunal the first requirement of there being an advance or loan was not fulfilled. In our view, the finding that there was no advance or loan is a pure finding of fact which does not give rise to any substantial question of law. However, even on the second aspect which has weighed with the Tribunal, we are of the view that the construction which has been placed on the provisions of s. 2(22)(e) is correct. Sec. 2(22)(e) defines the ambit of the expression 'dividend'. All payments by way of dividend have to be taxed in the hands of the recipient of the dividend namely the shareholder. The effect of s. 2(22) is to provide an inclusive definition of the expression dividend. Clause (e) expands the nature of payments which can be classified as a dividend. Clause (e) of s. 2(22) includes a payment made by the company in which the public is not substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance or loan was not fulfilled. The finding that there was no advance or loan is a pure finding of fact which does not give rise to any substantial question of law. Even on the second aspect which has weighed with the Tribunal, the construction which has been placed on the provisions of s. 2(22)(e) is correct. Sec. 2(22)(e) defines the ambit of the expression 'dividend'. All payments by way of dividend have to be taxed in the hands of the recipient of the dividend namely the shareholder. The effect of s. 2(22) is to provide an inclusive definition of the expression dividend. Clause (e) expands the nature of payments which can be classified as a dividend. Clause (e) of s. 2(22) includes a payment made by the company in which the public is not substantially interested by way of an advance or loan to a shareholder or to any concern to which such shareholder is a member or partner, subject to the fulfilment of the requirements which 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icial owner of the 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 10% of the voting power. This is one category and second one is a payment by way of advance or loan to any concern in which such shareholder is a member or partner and in which he has substantial interest. The third category is any payment by any such company for individual benefit of any such shareholders to the extent of which the company in either case possesses accumulated profits. 15. Later part of this definition states as to what is not included in dividend and the legislature has carefully specified that any advance or loan made to a shareholder or concern in which shareholder is a member or partner and in which he has substantial interest, by the company in ordinary course of his business where the lending of money is a substantial part of the business of the company or any dividend paid by a company which is set off by the company against the whole or any part of 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 not dividend w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18. Aggrieved and dissatisfied with the adverse order passed by the Assessing Officer also to the above effect so also initiation of proceedings for imposition of penalty that the matter was carried in Appeal interalia on this ground. We are not concerned with the other disallowances made by the Assessing Officer and which were also subject matter of the Appeal before the Commissioner of Income Tax, Mumbai. In the appellate order, the Commissioner noted ground no.6 which is the addition made of ₹ 96,16,924/ as deemed dividend. The Commissioner referred to the factual position and the arguments and found that the impugned credit balances are not the sums received from the related concern, having common shareholders as a loan or advance so that it could attract the provisions of Section 2(22) (e) of the I. T. Act. The credit balances represent cost of goods or services received by the Appellants and which cannot be treated as an advance or loan. Holding thus, he could have concluded that the credit entries are not covered by this provision and the payment does not fall therein. However, he assumed that the share holding pattern is such that the provisions of Section 2(22)(e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . But even the Assessing Officer has not found that the assessee company was a shareholder of any of the four companies. In such circumstances the CIT(A) was right in deleting the addition made under section 2(22)(e) following the order of the Special Bench cited above. It is also to be noted that the reasoning of the Special Bench has been upheld by the Hon'ble Bombay High Court in the case of CIT vs. Universal Medicare Private Limited (2010) 324 ITR 263(BOM). Both the order of the Special Bench and the judgment of the Hon'ble Bombay High Court have been noticed and followed in the order of the Tribunal in the case of M/s. Patel Aluminium Pvt Ltd(supra). Respectfully following the judgment of the Hon'ble Bombay High Court, we confirm the decision of the CIT(A) and dismiss the second ground. 21. As a result of the above quoted conclusion the Revenue's Appeal was dismissed. 22. We find that in identical factual position, the Revenue in the case of Universal Medicare formulated two questions and termed them as substantial questions of law. They were posed for consideration and determination of this Court. They were pressed during the course of arguments, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; 8. Clause (e) of Section 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 is substantially interested of any sum, whether as representing a part of the assets of the company or otherwise made after the 31 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject to the fulfillment of the requirements which are spelt out in the provision. Similarly, a payment made by a company on behalf, of for the individual benefit, of any such shareholder is treated by Clause (e) to be included in the expression 'dividend'. Consequently, the effect of Clause (e) of Section 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 ₹ 32,00,000/ is that there was a dividend under Section 2(22)(e) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the facts of the case noted by the Division Bench assuming the payment was dividend, it would have to be taxed not in the hands of the asseessee namely Universal but in the hands of the shareholder. 25. Once the correctness of this conclusion is put in issue before us and it is strenuously urged that it requires reconsideration, then, we cannot accept the first contention of the Revenue that the observations in the Division Bench judgment on the second aspect are mere obiter dictum and not a ratio and thus binding on us. They are a binding precedent as the Division Bench was directly called upon to answer the question based on the second aspect or the conclusion on the second point/ground urged before the Tribunal. 26. It is then urged that the Division Bench judgment in Universal Medicare does not take into consideration the amendments that have been made to the statute from time to time. It is urged that the amendment specifically refers to a person who is a beneficial owner of the shares. It is submitted that there are several words which have been substituted by the amendment. The words being a person who is a beneficial owner of share , therefore, cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf. What we have noted is that the legislature has incorporated and inserted the definition of the term dividend . It is made inclusive of distribution of profits, any distribution to the shareholders by a company of debentures, debenture-stock, or deposit certificate in any form, or distribution made to the shareholders upon liquidation of a company. Equally, amount distributed on reduction of capital is termed as dividend. What is also then included is a payment made by a company to its shareholder. That is by way of advance or loan to him. This is included so as to visit the shareholder with a liability to pay tax. It is eventually, the shareholder who will pay tax on the same. The shareholder cannot escape that liability merely because the loan or advance has been made over to any concern in which such shareholder is a member or a partner and in which he has substantial interest. Earlier, legislature noted that the shareholder would receive the sum from a company and which is not strictly falling within the concept of dividend . Firstly, because that was received by way of advance or loan, secondly, an attempt was made to show that the advance or loan is not to the shareh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lour Pvt Ltd. Suffice it to hold that the view taken by this Court in the case of M/s. Universal Medicare does not require any reconsideration. We are not in agreement with Shri Gupta that the definition does not contemplate or does not stipulate any requirement of assessee being a shareholder of the assessee like the one in the present case. The view taken in the present case that the recipient/assessee was not a shareholder, thus is in consonance with the legal position noted by us hereinabove. 31. We are of the further view that this Court merely restated this principle and which remains unaltered throughout from the case of Rameshwarlal Sanwarmal v/s Commissioner of Income Tax reported in 1980 (122) I. T. R. page 1 (SC). The Hon'ble Supreme Court held that it is only where a loan is advanced by the company to the registered shareholder and other conditions set out in Section 2 (6A) (e) of the then prevailing I.T. Act 1922 are satisfied that the amount of the loan would be liable to be regarded as deemed dividend within the meaning of that provision. The loan granted to the beneficial owner of the share, who is not registered shareholder would not fall within the meani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has also referred to the order passed by the Special Bench of the Tribunal in arriving at the same conclusion. In the Commissioner of Income Tax v/s Ankitech Pvt Ltd reported in 2012 (340) ITR page 14, the Hon'ble Delhi High Court referred to both Sarathy Mudaliar and Rameshwarlal Sanwarmal (supra), extensively. It also referred to the arguments of the Revenue which are somewhat similar to those raised before us. It is in dealing with these arguments that the Division Bench concluded that all the three limbs of the section analyzed in Universal Medicare denote the intention that closely held companies namely companies in which public are not substantially interested which are controlled by a group of members, even though having accumulated profits would not distribute such profit as dividend because if so distributed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt order dt. 29th Nov., 2002, the assessee went in appeal to Commissioner of Income-tax (Appeals) [for short, CIT(A) ] under s. 158BC(c) r/w s. 143(3) of the Act. By the order dt. 21st Feb., 2003, it was held by CIT(A) that the assessee did not possess any substantial interest in MKTPL or in SCPL during financial year 1999-2000; that MKF and MKI had no substantial interest in MKSEPL, SCPL and MKTPL during financial year 1999- 2000; that SCPL did not make any loan to MKI during the financial year 1999-2000; that SCPL had borrowed money from MKI and all payments made by SCPL during financial year 1999-2000 were repayments of loans advanced by MKI; that the assessee had 16 per cent share in MKF; that MKSEPL had a current account in the books of MKF and that in most cases MKF had advanced loans to MKSEPL. According to CIT(A), MKSEPL have repaid those loans to MKF in which the assessee had substantial interest. According to CIT(A), the nature of transactions between MKF and MKSEPL consisted of a running account; it consisted of giving of loans and repayments thereof. According to CIT(A), none of the two firms had any substantial interest in MKSEPL, SCPL and MKTPL. According to CIT(A), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs in January, 2000; that SCPL stood merged in MKSEPL vide order of the High Court dt. 5th July, 2001 with retrospective effect, i.e. 18th May, 1998; that in January, 2000 SCPL had no legal existence since the merger had taken place w.e.f. 18th May, 1998; that merger had taken place under a voluntary scheme in which every shareholder of the two companies agreed; that, therefore, there was no merit in the contention of the assessee that his shareholding in SCPL and the accumulated profits of SCPL were not liable to be taken into account; according to the Tribunal, in the aforestated circumstances, all payments should be taken to have originated from MKSEPL; the Tribunal further found that the accumulated reserves of MKSEPL was ₹ 55 crores, nearly ten times in excess of ₹ 5.99 crores taxed as deemed dividend. It is not in dispute that the assessee had more than 10 per cent of the total voting power in MKSEPL. In the circumstances, the Tribunal took the view that MKSEPL made payment to the said two firms for the benefit of the assessee who thereafter bought the said Bonds. According to the Tribunal, MKSEPL was the only company which made the disbursement through MKF and MK ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial year then AO had no reason to treat ₹ 5.99 crores as deemed dividend under s. 2(22)(e) and for the above reasons the High Court set aside the judgment of the Tribunal dt. 28th Jan., 2005. Hence this civil appeal. 6. According to Mr. Mohan Parasaran, learned Addl. Solicitor General appearing for the appellant (Department), the High Court should not have interfered with the findings of facts recorded by the Tribunal; that there was no substantial question of law; that no perversity in the findings recorded by the Tribunal so as to warrant interference under s. 260A of the Act; that the Department had searched the premises, it had seized the diary ML-20 which contained entries subsequently corroborated by cash flow chart which indicated that money had originated from MKSEPL to the two firms through which it had gone to the assessee and, therefore, the Department was right in assessing ₹ 5.99 crores as deemed dividend in the hands of the assessee under s. 2(22)(e). Learned counsel urged that the five entries discovered in the search represented five transactions/payments for purchase of 9% RBI Relief Bonds. These, according to the learned counsel, were not r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f accounts maintained regularly by the said two firms indicated such withdrawals the AO directed the Authorized Representatives of the assessee to prepare a statement indicating the source from which moneys came in the hands of the two firms and out of which withdrawals were made by the assessee to make investment in the 9% RBI Relief Bonds, therefore, according to the learned counsel, no incriminating material whatsoever was found in the course of the search which could enable the AO to invoke s. 2(22)(e) of the Act. According to the learned counsel, in the above circumstance, Chapter XIV-B dealing with block assessment was wrongly invoked by the AO. On the nature of the transactions, learned counsel urged that during the financial year 1999-2000, the assessee had invested ₹ 26.35 crores in the purchase of bonds; that the said investment was made out of the disclosed sources through cheques and that the said investment was mentioned in the bank accounts and in the tax records of the assessee long before the search. Learned counsel urged that the immediate source of investment was the withdrawal of ₹ 26.35 cores from the partners capital account with MKF and MKI. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22)(e) of the Act. Learned counsel submitted that s. 2(22)(e) had no application in the matter of the above two facts. Learned counsel urged that the Tribunal failed to appreciate that the assessee did not hold any shares in SCPL on or after 1st April, 1999 and, therefore, he did not have any interest in SCPL on the dates when ₹ 2.79 crores were repaid by SCPL to MKI. 8. Learned counsel contended that the accumulated profits of MKSEPL could not be treated in law as the accumulated profits of SCPL in spite of the order dt. 5th July, 2001 passed by the High Court approving the merger of SCPL with MKSEPL, even when such merger was made effective from 18th May, 1998. Learned counsel submitted that the Tribunal had failed to appreciate that MKSEPL had not merged with SCPL but it is SCPL which had merged with MKSEPL. As a result of the said merger the accumulated profits of MKSEPL did not vest in SCPL. Learned counsel, therefore, submitted that the subsequent event of the Court s order dt. 5th July, 2001 approving merger of SCPL with MKSEPL cannot enable the Revenue to treat the accumulated profits of MKSEPL as part of the accumulated profits of SCPL. Learned counsel further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Applying the above test to the facts of the present case, we are of the view that the Tribunal was right in holding, on examination of the cash flow statement, that MKSEPL had made payments to MKF and MKI for the benefit of the assessee which enabled the assessee to buy 9% RBI Relief Bonds in the financial year 1999-2000. It is in this sense that the Tribunal was right in holding that the two firms were used as conduits by the assessee. It is not in dispute that the assessee had more than 10 per cent of voting power in MKSEPL during the block period. It is not in dispute that the assessee had substantial interest of about 16 per cent in MKF. It is not in dispute that the three companies were the controlled companies. There is one more point which needs to be mentioned. The timing of so-called repayments by the company to MKF and MKI and the immediate withdrawal of the funds by the assessee-cum-director-cumshareholder- cum-partner and the timing of investment in purchase of Bonds were around the same time. Moreover, in MKSEPL the assessee is not only a shareholder having more than 10 per cent of total voting power, he is also a director of that company. The said company is also a pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the respondent. 11. As regards the contention advanced on behalf of the assessee that the accumulated profits of MKSEPL could not be treated as the accumulated profits of SCPL in spite of the order of merger w.e.f. 18th May, 1998, we agree with the view expressed by the AO that on merger the accounts of the two companies had merged and, therefore, the reserves had to be taken on the basis of merged account. Moreover, the assessee had substantial interest in MKSEPL right from the inception. Lastly, in the present case, we are concerned with the block assessment which covers the period 1st April, 1990 to 24th Aug., 2000. 12. Before concluding, we quote hereinbelow the relevant paragraphs from the judgment of the Calcutta High Court in the case of Nandlal Kanoria vs. CIT, (1980) 122 ITR 405 (Cal) at p. 415 : The only question which remains to be considered is that whether the said company made the payments of the said sum of ₹ 75,000 and ₹ 4,80,000 to Indira Co. for the benefit of the assessee. So far as ₹ 75,000 is concerned it is found by the Tribunal, though not very clearly, that this amount was received by Indira Co. from the said co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each payment by the company to the assessee and this contention must, therefore, be rejected. If Mr. Rajgopal s contention was to be accepted, the result would be that if a shareholder borrows a large amount during the year, but repays it on the last day of the year, it would not be considered to be a loan, though the facts show that he did borrow a loan. Such a contradiction of the real fact would result if Mr. Rajgopal s contention were to be accepted. Mr. Rajgopal further contended that in any event the highest amount to the assessee s debit on any day of the year should be the amount to be deemed to be dividend. This argument, again, ignores the principle laid down by us, that the position at the date of each payment must be considered. Moreover, there is another reason and that is that if it were to be so done, it would not enable the position of the balance of the accumulated profits being taken into account, as more than one shareholder may have borrowed loans from the company in an account similar to that of the assessee. All these contentions of Mr. Rajgopal ignore the basic fact that s. 2(6A)(e) uses the words any payment which means, every payment, and s. 2(6A)(e) r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power. [Para 15] Under the Indian Income-tax Act, 1922, two categories of payment were considered as dividend, viz., ( a ) any payment by way of advance or loan to a shareholder was considered as dividend paid to shareholder or ( b ) any payment by any such company on behalf or for the individual benefit of a shareholder was considered as dividend. [ Para 16] In the 1961 Act, the very same two categories of payment were considered as dividend, but an additional condition, that payment should be to a shareholder being a person who is the beneficial owner of shares and who has a substantial interest in the company, viz., shareholding which carries not less than twenty per cent of the voting power, was introduced. [Para 17] By the 1987 amendment with effect from 1-4-1988, the condition that payment should be to a shareholder 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 te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so do not substitute the aforesaid requirement to a requirement of merely holding a beneficial interest in the shares without being a registered holder of shares. The expression being is a present participle. A participle is a word which is partly a verb and partly an adjective. In section 2( 22 )( e ), the present participle being is used to describe the noun shareholder like an adjective. The expression being a person who is the beneficial owner of shares is, therefore, a further requirement before a shareholder can be said to fall within the parameters of section 2( 22 )( e ). In the 1961 Act, section 2( 22 )( e ) imposes a further condition that the shareholder has also to be 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. Thus, it was not possible to accept the contention of the revenue that under the 1961 Act there was no requirement of a shareholder being a registered holder and that even a beneficial ownership of shares would be sufficient. [Para 23] The expression Shareholder being a person who is the beneficia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a beneficial owner. The three trustees of NNT held shares in UPPL and BCPL only as a legal and registered owner. They held shares for and on behalf of 5 beneficiaries of the trust who were different individuals. They were, therefore, not beneficial owners of the shares. Trust ownership is a peculiar instance of duplicate ownership. Trust property is, in fact, owned by two persons simultaneously in the sense that one is under an obligation to use the property for the benefit of the other. The ownership of the trustee called trust ownership is nominal rather than 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, that is, the trustee is clothed with the rights of the beneficiary and is so enable 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 persons who for any reason are unable effectively to protect them for themselves. Such protect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the concern. [Para 35] The basis of bringing in the amendment to section 2( 22 )( e ) by the Finance Act, 1987 with effect from 1-4-1988 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 non-shareholder, 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 section 5( 1 )( b ) in the hands of the shareholder only and not in the hands of the payee, viz., non-shareholder (Concern). Section 5( 1 )( a ) contemplates that the receipt or deemed receipt should be in the nature of income. Therefore, the deeming fiction can be applied only in the hands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be construed as dividend could not 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. [Para 38] Further, in the event of the payment of loan or advance by a company to a concern being treated as dividend and taxed in the hands of the concern then, the benefit of set off cannot be allowed to the concern, because the concern can never receive dividend from the company which is only paid to the shareholder, who has substantial interest in the concern. The above provisions also, therefore, contemplate deemed dividend being taxed in the hands of a shareholder only. [Para 40] In view of aforesaid, it was opined 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. Further, the expression shareholder referred to in section 2( 22 )( e ) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of section 2( 22 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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