TMI Blog2018 (12) TMI 1060X X X X Extracts X X X X X X X X Extracts X X X X ..... 706/Bang/2017 - - - Dated:- 16-11-2018 - SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For The Appellant : Shri S.V. Ravishankar, Advocate For The Respondent : Dr. P.V. Pradeep Kumar, Addl.CIT(DR)(ITAT), Bengaluru ORDER Per N.V. Vasudevan, Vice President This appeal by the assessee is against the order dated 05.05.2017 of the CIT(Appeals), Hubli relating to assessment year 2012-13. 2. The first issue that arises for consideration in this appeal is with regard to the action of the revenue authorities in bringing to tax a sum of ₹ 4 crores as deemed dividend u/s. 2(22)(e) of the Income-Tax Act, 1961 [ the Act ]. 3. The facts with regard to the above said addition are as follows. The assessee is a company engaged in the business of manufacture of valves. The assessee borrowed a sum of ₹ 4 crores from M/s. Micofinish Pumps Pvt. Ltd. ( MPPL ). The AO noticed that there were common directors in both the assessee company and MPPL and therefore the sum of ₹ 4 crores received as advance from MPPL was liable to be added as deemed dividend u/s. 2(22)(e) of the Act in the hands of the assessee compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Microfinish Pumps Pvt. Ltd. are having substantial interest i.e. shareholding exceeding 20%). Hence the said advances of ₹ 4,00,00,000/ - amounts to deemed dividend within the meaning of the provisions of section 2(22)(e) of the Act. Accordingly the said amount of ₹ 4,00,00,0001- is assessed to tax in the hands of the assessee company. 5. On appeal by the assessee, the CIT(Appeals) confirmed the order of the AO for the following reasons:- 14. Before me, the assessee has filed written submission in which it has came up with new explanation stating that ₹ 400 lakhs received is not loan or advance but it is an inter-corporate deposits received from Micro-finish Pumps Pvt. Ltd. Apart from repeating the same explanation as was done before the Assessing Officer. with case laws. the assessee has not added anything. 15. In view of the above findings. it is very clear that M/s. Micro-finish Trading Pvt. Ltd., (Wherein the directors of the assessee company have substantial interest i.e. shareholding exceeding 20%) has huge accumulated profits as on date of advances of ₹ 400 lakhs made to the assessee company (wherein the directors of M/s. Micro-fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or otherwise) made after the 31-5-1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. Explanation-3 to Section 2(22)(e) is as follows: Explanation-3: For the purpose of this clause- ( a) concern means a Hindu Undivided Family, or a firm or an association of persons or a body of individuals or a company; ( b) 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 twenty percent of the income of such concern; 9. Section 2(32) defines the expression person who ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 percent of the income of such concern; and where the concern is a company he must be the owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty percent of the voting power (d) If the above conditions are satisfied then the payment by the company to the concern will be dividend. 12. The Special Bench of ITAT, Mumbai, in the case of Bhaumik Color Labs ITA 5030/M/04, 118 ITD 1 (SB) (Mum) , considered the question Whether deemed dividend u/s. 2(22)(e) of the Income Tax Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender? The Special Bench held that deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. The Special Bench on the above issue has observed as follows:- 30. At the outset it has to be mentioned that provisions of Sec.2(22)(e) which brought in a n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany the assessment as deemed dividend in the hands of the firm was not correct. The order of the CIT(A) was confirmed by the Tribunal. On Revenue s appeal before the Hon ble High Court, the following question of law was framed for consideration:- Whether on the facts and in the circumstances of the case and in law the learned Tribunal was justified in upholding the order of learned CIT(A) deleting the addition of ₹ 10 lacs as deemed dividend under Section 2(22)(e) of the IT Act? The Hon ble Court held as follows:- The important aspect, being the requirement of section 2(22)(e) is, that the payment may be made to any concern, in which such shareholder is a member, or the partner, and in which he has substantial interest, or any payment by any such company, on behalf or for the individual benefit of any such shareholder . Thus, the substance of the requirement is that the payment should be made on behalf of or for the individual benefit of any such shareholder, obviously, the provision is intended to attract the liability of tax on the person, on whose behalf, or for whose individual benefit, the amount is paid by the company, whether to the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the hands of shareholder. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which it s shareholder has substantial interest, is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern. 36. The basis of bringing in the amendment to Sec.2(22)(e) of the Act by the Finance Act, 1987 w.e.f 1-4-88 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24 ITR 263 (Bom) , CIT Vs. Ankitech Pvt.Ltd. others 340 ITR 14 (Del.), National Travel Services (2012) 249 CTR (del) 540 and the Hon ble Karnataka High Court in the case of CIT Vs. Sarva Equity (P) Ltd., (2014) 111 DTR 207 (Karn.) and the Hon ble Supreme Court in the case of CIT Vs. Madhur Housing and Development Co. 401 ITR 152(SC) . Since the Assessee in the present case is not a shareholder in the lender company, we are of the view that the above decision is squarely applicable to the facts of the Assessee s case. 15. In view of the aforesaid decision, we are of the view that the action of the revenue authorities in bring to tax a sum of ₹ 4 Crores as deemed dividend u/s.2(22)(e) of the Act cannot be sustained and the said addition is directed to be deleted. The relevant ground of appeal of the Assessee is allowed. 16. The next issue that arises for consideration is with regard to the disallowance u/s. 14A of the Act. As far as the disallowance is concerned, the same is only with regard to disallowance of other expenses under Rule 8D(2)(iii) of the Income-tax Rules, 1962 [the Rules]. The argument advanced on this issue are general and vague. The computation ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
