TMI Blog2019 (11) TMI 1142X X X X Extracts X X X X X X X X Extracts X X X X ..... Silver Oak trees which were felled at her agricultural lands. The application for settlement was made since the petitioner was not able to prove that the seized cash was out of the sale of such trees. Apprehending that the amounts advanced by RSPL to RTPL may be assessed as deemed dividend is in the hands of the petitioner, a mention was made in the application that the petitioner is a shareholder, holding more than 20% of equity share capital in both the Companies and that RSPL had advanced the money in the ordinary course of its business as corporate loans to RTPL. It is nobody s case that the petitioner claimed a portion of the sum of ₹ 35 lakhs offered as income, to be taxable. Hence the contention of Department that a piecemeal challenge to the Settlement Commission s order is not maintainable, cannot be sustained. As such, this Court is of the view that the challenge to the impugned order of the Settlement Commission by invoking Article 226 of the Constitution of India in this Writ Petition, is maintainable. Relevance and validity of CBDT Circulars - whether the Circulars of the CBDT are binding on the Settlement Commission and if so, whether the contents of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... THAT:- It is not in dispute that Section 2 (24) includes dividend income also. What is pertinent is that such dividend, including the deemed dividend under Section 2(22)(e) of the Act, is exempted under Section 10 (34) of the Act, in the hands of the petitioner. Section 10 (34) of the Act does not provide to say that the dividend will be exempted in the hands of the shareholders only when dividend distribution tax is paid. On the other hand, it only refers to say that as long as the dividend is referred to in Section 115-O of the Act, it will be exempted from tax under Section 10 (34) of the Act. In SMT. KAYAN JAMSHID PANDOLE [ 2018 (11) TMI 1340 - BOMBAY HIGH COURT] has emphatically held that if certain income is exempted in the hands of the recipient by virtue of statutory provisions, such an exemption cannot be withdrawn only because the payer has not paid the tax, unless such provisions are made in the statute itself. In the light of the aforesaid decision, it can be held that the Settlement Commission ought to have passed orders only in accordance with the provisions of the Act and the contrary findings in the impugned order of the Commission, cannot be sustained. As su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31.08.2015, had submitted that there was no incriminating material in relation to deemed dividend found during the search and accordingly, no addition can be made under Section 2(22)(e). The said contention was taken note of by the Settlement Commission in paragraph 7.2 of its order but however, had failed to address the issue. Petitioner had submitted before the Settlement Commission during the course of search under Section 132 of the Act that no fresh incriminating material with respect to the deemed dividend was found. Unfortunately, the Settlement Commission has not addressed this issue at all. Thus, the proceedings under Section 153A r/w. 153C of the Act are not valid. For all the foregoing reasons, this Court is of the affirmed view that the order of the Settlement Commission is not in accordance with the provisions of the Act and therefore, this Court would be justified in invoking its extraordinary powers under Article 226 of the Constitution of India. Accordingly, the impugned order of the Income Tax Settlement Commission insofar as it relates to determination of deemed dividend as the income of the petitioner for the assessment years 2009-2010 to 2013-2014 are con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The petitioner offered the income of ₹ 35 lakhs seized from her residence as additional income for the assessment year 2013-2014 and also disclosed that the said income was derived out of the sale of Silver Oak trees which were felled at her agricultural lands. The application for settlement was claimed to have been made since the petitioner was not able to prove that the seized cash is out of the sale of such trees. c) In the application before the Income Tax Settlement Commission (hereafter referred to as Commission ), the petitioner had disclosed that she was a shareholder, holding more than 20% of equity share capital in each of the two Companies namely, M/s. Rasi seeds Private Limited (RSPL) and M/s. Rasi Tex India Private Limited (RTPL) and that RSPL had advanced monies in the ordinary course of its business as inter corporate loans to RTPL. d) The second respondent submitted a report under Rule 9 of the Income Tax Settlement Commission Procedure Rules, requesting the Commission to hold that the petitioner is liable to be taxed on the deemed dividend under Section 2 (22) (e) of the Act and alternatively to treat the application is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of all the aforesaid contentions, the learned Senior counsel for the petitioner relied on various decisions, which I shall address while discussing such contentions. 6. Substantiating the findings of the Commission in the impugned order, Mr.A.P. Srinivas, learned Senior Standing counsel for the Department countered the aforesaid submissions of the petitioner, in the following manner: a. The Circulars of the CBDT will not bind the Courts, especially, when it is against the provisions of law. Even otherwise, without explaining how the transactions between the two Companies constitute ordinary commercial transactions, the petitioner cannot rely on the circulars. b. The case of the petitioner does not fall within the exclusion as defined in Section 2(22)(e)(ii) of the Act. There is a factual finding of fact by the Commission in the impugned order that lending of money was not a substantial part of the business of RSPL. According to the Department, the word ordinary course of business is qualified by the words where the lending of money is substantial part of the business . c. The exemption under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Standing counsel submitted that the decision making process alone can be challenged and not the decision itself. Even otherwise, piecemeal acceptance of the Settlement Commission s order and a challenge to the remaining portion is impermissible. 11. The various arguments advanced by the learned Senior counsel for the petitioner, which have been extracted above, are to the effect that the impugned order of the Commission is not in accordance with the provisions of the Act. Among the various grounds raised by the petitioner, two primary grounds are to the effect that advances in the nature of commercial transactions would not fall within the ambit of Section 2 (22) (e) and that dividend is not taxable as per the provisions of Section 10 (34) of the Act. These grounds are predominantly to the effect that the findings rendered by the Settlement Commission in the impugned order are not in accordance with the provisions of the Act. 12. In Jyotendrasinhji (supra), the Hon'ble Apex Court had held that the only ground upon which the Court could interfere against the order of the Commission is that when such order is contrary to the provisions of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble of the N.W. Police v. Evans, [1982] 1 W.L.R.1155. Thus, the appellate power under Article 136 was equated to power of judicial review, where the appeal is directed against the orders' of the Settlement Commission. For all the above reasons, we are of the opinion that the only ground upon which this Court can interfere in these appeals is that order of the Commission is contrary to the provisions of the Act and that such contravention has prejudiced the appellant The main controversy in these appeals relates to the interpretation of the settlement deeds though it is true, some contentions of law are also raised. The commission has interpreted the trust deeds in a particular manner, Even if the interpretation placed by the commission the said deeds is not correct, it would not be a ground for interference in these appeals, since a wrong interpretation of a deed of trust cannot be said to be a violation of the provisions of the Income Tax Act. it is equally clear that the interpretation placed upon the said deeds by the Commission does not bind the authorities under the Act in proceedings relating to other assessment years. 13. In C A Abraham, (supra) the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d deliberated by the respective counsels. RELEVANCE AND VALIDITY OF CDBT CIRCULARS: 16. The learned Senior counsel for the petitioner, would place reliance on two Circulars issued by the Central Board of Direct Taxes (CBDT). While Circular No. 19 of 2017 directs that advances in nature of commercial transaction would not fall within the ambit of Section 2(22)(e) and that no appeals be filed by the Department on this ground and those already filed shall be withdrawn or not pressed upon, Circular No. 495 of 1987 directs that deemed dividend will be taxable in the hands of the concern were loan/advances are made by a Company to concern with common shareholder. Reliance was placed on the decisions in UCO Bank V. CIT [ (1999) 237 ITR 889 (SC)] ; Navnit Lal C. Javeri Vs ACIT [ (1965) 56 ITR 198 (SC)] ; KP Verghese V. ITO [ (1981) 131 ITR 597 (SC)] ; and Keshavji Ravji and Company V. CIT [ (1990) 183 ITR 1 (SC)] in this regard. 17. The learned Standing counsel for the Department would oppose this proposition stating that without explaining how the transactions between the two Companies constitute ordinary commercial trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is credited to suspense account or to interest account. The Kerala High Court has also expressed the same view in the case of State Bank of Travancore v. Commissioner of Incometax, Kerala [110 ITR 336]. The amount of such interest is, therefore, includible in the taxable income. The withdrawal of the circular of 6th of October, 1952 which had been in force for thirty six years was on account of the decision of the Kerala High Court in State Bank of Travancore v. Commissioner of Income-tax, Kerala (Supra). The Central Board of Direct Taxes, however, issued another circular of 9th of October, 1984 under which the Central Board of Direct Taxes decided that interest in respect of doubtful debts credited to suspense account by the banking companies will be subjected to tax but interest charged in an account where there has been no recovery for three consecutive accounting years will not be subjected to tax in the fourth year and onwards. However, if there is any recovery in the fourth year or later the actual amount recovered only will be subjected to tax in the respective years. This procedure will apply to assessment year 1979- 80 and onwards. The Board's Ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the work relating to assessment. Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board thus has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under Section 119 of the Income-tax Act which are binding on the authorities in the administration of the Act. Under Section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. Thus, the authority which wields the power for its own advantage under the Act is given the right to forego the advantage when required to wield it in a manner it considers just by relaxing the rigour of the law or in other permissible manners as laid down in Section 119. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases which can be properly categorised as belonging to a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advanced. The Minister, therefore, gave an assurance in Parliament that outstanding loans and advances which are otherwise liable to be taxed as dividends in the assessment years 1955-56 will not be subjected to tax if it is shown that they had been genuinely refunded to the respective companies before 30th of June, 1955. Accordingly, a circular was issued by the Central Board of Revenue on 10th of May, 1955 pointing out to all income tax officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions and not bring them within the mischief of the new provision. The officers, therefore, were asked to intimate to all the companies that if the loans were repaid before 30th of June, 1955 in a genuine manner, they would not be taken into account in determining the tax liability of the shareholders to whom they may have been advanced despite the new section. This circular was held by this court as binding on the Revenue, though limiting the operation of Section 12(1B) or excluding certain transactions from the ambit of Section 12(1B). It was so held becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forceable, Instruction No.1A88 issued by the Central Board of Direct Taxes relating to the enforcement of the provisions of Chapter XX-C of the Income-tax Act. The Central Board pointed out in the said instruction that in administering the provisions of the said Chapter, it has to be ensured that no harassment is caused to bona fide and honest purchasers or sellers of immovable property and that the power of preemptive purchase has to be exercised by the appropriate authority only when it has good reason to believe that the property has been sold at an undervalue and there is payment of black money in the transaction. The instruction that when the property is put up for sale by the appropriate authority, the reserve price should be fixed at a minimum of 15% above the purchase price shown as the apparent consideration under the agreement between the parties, was held to be binding on the authority. The Constitution Bench in the above case also approved of the decision of this Court in K.P. Varghese v. Income Tax Officer (Supra). There are, however, two decisions of this Court which have been strongly relied upon by the respondents in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t granted under the earlier circular was no longer available to the assessee and those circulars could not be resorted to for the purpose of overcoming the provisions of the Act. Interestingly, the concurring judgment of the second judge has not dealt with this question at all but has decided the matter on the basis of other provisions of law. The said circulars under Section 119 of the Income- tax Act were not placed before the Court in the correct perspective because the later circular continuing certain benefits to the assessees was overlooked and the withdrawn circular was looked upon as in conflict with law. Such circulars, however, are not meant for contradicting or nullifying any provision of the statute. They are meant for ensuring proper administration of the statute, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation to the provision in question so as to benefit the assessee and make the application of the fiscal provision, in the present case, in consonance with the concept of income and in particular, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or sticky loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received. We do not see any inconsistency or contradiction between the circular so issued and Section 145 of the Income-tax Act. In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to Section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the income tax authorities in a specific situation and, therefore, validly issued under Section 119 of the Income-tax Act. As such, the circular would be binding on the Department. The other judgment on which reliance was placed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the High Court. The ratio that the instructions given by the CBDT are binding on the authorities had been reiterated in Hindustan Aeronautics Ltd (supra). What has been clarified in the said case is that such instructions cannot supersede the law declared by the Hon'ble Supreme Court of the High Court. It is in this background that reference was made to the decisions in Navnit Lal C. Javeri and KP Verghese (supra) and a perusal of the observations made in this regard may not be considered of having been distinguished from the position laid down in Hindustan Aeronautics Ltd. Similar findings were rendered in Rattan Melting and Wire Industries. 22. The observations made in Hindustan Aeronautics Ltd are as follows: However, the learned counsel for the appellant relied on the decisions in Navnitlal C. Javeri v. K.K.Sen, AAC of Income Tax, 56 ITR 198, Ellerman Lines Ltd. vs. C.I.T, 82 ITR 913 and K.P.Varghese vs. ITO, 131 ITR 597, to contend that the circular issued by the Board under Section 119 of the Act is binding on the Commissioner in terms of which he was bound to examine the revision of the appellant on merits and the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority who has to question that. To lay content with the circular would mean that the valuable right of challenge would be denied to him and there would be no scope for adjudication by the High Court or the Supreme Court. That would be against very concept of majesty of law declared by this Court and the binding effect in terms of Article 141 of the Constitution. 24. Useful reference could be made to the decision of a Division Bench of the Bombay High Court in the case of Commissioner of Income Tax V. Income Tax Settlement Commission and another [ (2014) 364 ITR 410 (Bom)] wherein most of the decisions discussed above were considered and ultimately held that the Circulars of the CBDT have a binding force. 25. Now that, it is found that the Circulars of the CBDT are binding in nature, the consequent issue as to whether the contents of the circulars would allure to the benefit of the petitioner herein, requires consideration. For a proper appraisal, the (relevant) portions of these two Circulars are extracted hereunder: Circular No. 19/2017 F.No.279/Misc./140/2015/ITJ Government of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... city generators belonging to the sister concern. The company utilised gas available to it from GAIL to generate electricity and supplied it to the sister concern at concessional rates. It was held that the security deposit made by the company to its sister concern was a business transaction arising in the normal course of business between two concerns and the transaction arising in the normal course of business between two concerns and the transaction did not attract section 2(22)(e) of the Act. (CIT, Agra V. Atul Engineering Udyog, Allahabad High Court). 3. In view of the above it is, a settled position that trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word 'advance' in Section 2 (22)(e) of the Act. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and those already filed, in Courts/Tribunals may be withdrawn/not pressed upon. 4. The above may be brought to the notice of all concerned. 5. Hindi version follows. (Neetika Basal) Deputy Secretary to Government of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds of a concern where all the following conditions are satisfied: i) where the company makes the payment by way of loans or advances to a concern; ii) where a member or a partner of the concern holds 10 per cent of the voting power in the company; and iii) where the member or partner of the concern is also beneficially entitled to 20 per cent of the income of such concern. With a view to avoid the hardship in cases where advances or loans have already been given, the new provisions have been made applicable only in cases where loans or advances are given after 31st May, 1987. These amendments will apply in relation to assessment year 1988-89 and subsequent years. ... 26. Circular No. 19 of 2017 directs that advances in the nature of commercial transaction would not fall within the ambit of Section 2 (22)(e) of the Act. Accordingly, it was directed therein that appeals may not be filed on this ground by officers of the Department and those appeals already filed may be withdrawn or not pressed. If the directions of the Circular is pressed into service, the transaction be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant portions of the said judgment reads as below: The Tribunal has also referred to the judgment of the Bombay High Court in the case of C.I.T. Vs. Nagin Das M. Kapadia 177 ITR 393 (Bom) in which it was held that business transactions are outside the purview of Section 2(22)(e) of the Act. In the said case, the company in which Kapadia was having substantial interest had paid various amount to Kapadia. The Tribunal had ITA 250/2009 Page 6 found that Kapadia had business transactions with the company and on verification of the accounts, the Tribunal deleted the amounts which were relating to the business transactions and which finding was upheld by the High Court. 9. In the present case the Tribunal on considering decisions in various cases held as under: From the ratio laid down in above cases and on the basis of judicial interpretation of words, Loans or Advances , it can be held that section 2(22)(e) can be applied to Loans or Advances simplicitor and not to those transactions carried out in course of business as such. In the course of carrying on business transaction between a company and a stockholder, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since M/s. Pee Empro Exports Pvt. Ltd. is not into the business of lending of money, the payments made by it to the assessee company would therefore be covered by Section 2(22)(e)(ii) and consequently payments even for business transactions would be a deemed dividend. We do not agree. The Tribunal has dealt with this aspect as reproduced in para (9) above. The provision of Section 2(22)(e)(ii) is basically in the nature of an explanation. That cannot however, have bearing on interpretation of the main provision of Section 2(22)(e) and once it is held that ITA 250/2009 Page 8 the business transactions does not fall within Section 2(22)(e), we need not to go further to Section 2(22)(e)(ii). The provision of Section 2(22)(e)(ii) gives an example only of one of the situations where the loan/advance will not be treated as a deemed dividend, but that s all. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of Section 2(22)(e). We feel that this interpretation of ours is in accordance with the legislative intention of introducing Section 2(22)(e) and which has been extensively dealt with by this Court in the judgment in Raj Kumar s ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference to words found in immediate connection with them and our Supreme Court in the case of Rohit Pulp Paper Mills Ltd. v. Collector of Central Excise, AIR 1991 SC 754 and State of Bombay v. Hospital Mazdoor Sabha AIR 1960 SC 610. 12. Therefore, we hold that the Tribunal was correct in holding that the amounts advanced for business transaction between the parties, namely, the assessee company and M/s. Pee Empro Exports Pvt. Ltd. was not such to fall within the definition of deemed dividend under Section 2(22)(e). The present appeal is therefore dismissed. The aforesaid decision in Creative Dyeing and Printing Private Limited was upheld by the Hon'ble Supreme Court in an order dated 22.09.2009 in a special leave to appeal. 29. In CIT V. C. Subba Reddy , (2017) 77 Taxmann. com 320 (Madras High Court), a Hon'ble Division Bench of this Court held thus: 3. The decision of the Calcutta High Court in the case of M.D.Jindal vs. Commissioner of Income Tax (164 ITR 28) was relied upon to counter the objection of the Assessee to the effect that the credit arose out of a business transaction to which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the legislature, when the words of the Section are clear and unambiguous? iii)Whether on the facts and circumstances of the case, the Tribunal was right in looking at the transaction between the two companies in other years to arrive at the conclusion that the loan granted in the relevant financial year does not amount to deemed dividend under Section 2(22)(e)of the Act? 6. We have heard the submissions of Mr.T.Ravikumar, learned counsel appearing for the Revenue and Mr.S.Sri Mr.S.Sridhar, learned 5 counsel appearing for the Assessee. 7. The provisions of Section 2(22)(e) impose a deeming fiction and the conditions imposed therein call for strict and concurrent satisfaction being (i) payment by closely held company, (ii) of the nature of an advance or loan, (iii) to a share holder or beneficial owners of shares, (iv) with more than 10% voting power, (v) for his individual benefit. 8. In the present case, the credit arises by virtue of a contractual obligation and a business transaction and has been settled the very next year. There is no individual benefit derived by the Assessee. Moreover, the cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction under Section 260A of the Act, we ought not to enter into fresh exercise of appreciation of evidence. He has drawn our attention to that part of the decision of the Tribunal in which analysis has been made of ledger of the assessee in the books of the company. We shall revert to the finding of the Tribunal on this count later in this judgment. Law on this point is clear. In the event of transactions between a shareholder and a company in which the public are not substantially interested and the former has substantial stake, create mutual benefits and obligations, then the provision of treating any sum received by the shareholder out of accumulated profits as deemed dividend would not apply. The company in the instant case fits the description conceived in the aforesaid provision to come within the ambit of Section 2(22)(e) of the Act. The controversy which falls for determination is whether the sum received by the assessee formed part of running current account giving rise to mutual obligations or the payment formed one-way traffic, assuming the character of laon or advance out of accumulated profit. A Co-ordinate Bench of this Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IDEND IS TAXABLE IN THE HANDS OF THE SHAREHOLDERS OR CONCERN? 32. The learned Senior counsel for the petitioner would submit that, even assuming that deemed dividend will be taxable, in view of Circular No. 494 of 1987, such deemed dividend will be taxable in the hands of the concern only and there is no justification for casting the liability on the shareholder. Attention of this Court was brought to diverging views of the Hon ble Apex Court in the case of Madhur Housing (TS-462-SC-2017) , wherein the decision of the Delhi High Court in the case of Ankitech Private Limited [ (2012) 340 ITR 14 (Delhi) ] was relied on and held that deemed dividend is taxable in the hands of shareholder, while in the case of Gopal and sons (HUF) [ 391 ITR 1] , it was held that deemed dividend is taxable in the hands of the concern. When the issue came up for consideration in National Travel Services (Appeal No. 837) , the Hon ble Apex Court had referred the matter to a larger Bench to have a relook into the controversy. 33. While the petitioner contends that deemed dividend is not taxable in the hands of shareholders, the learned Standing counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income tax chargeable in respect of the total income of domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the first day of April 2003, whether out of current or accumulated profits shall be charged two additional income tax (hereafter referred to as tax on distributed profits) at the rate of 15%. 36. Section 115-O, which falls under Chapter XII-D of the Act, does not define the term 'dividend'. However, the explanation to Section 115-Q, which also falls under Chapter XII-D, makes it clear that 'dividend' referred to in Section 115-O also includes 'deemed dividend' as defined in Section 2 (22) (e) of the Act. The explanation to Section 115Q reads thus: 115Q . If any principal officer of domestic company and the company does not pay tax on distributed profits in accordance with the provisions of section 115-O, then, he or it shall be deemed to be an assessee in default in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is not for the entire Chapter but has been generally excluded. Therefore, it is quite evident that, wherever the term 'dividend' is used in Section 115BBDA, Section 2(22)(e) is not covered. 40. It is not in dispute that Section 2 (24) includes dividend income also. What is pertinent is that such dividend, including the deemed dividend under Section 2(22)(e) of the Act, is exempted under Section 10 (34) of the Act, in the hands of the petitioner. Section 10 (34) of the Act does not provide to say that the dividend will be exempted in the hands of the shareholders only when dividend distribution tax is paid. On the other hand, it only refers to say that as long as the dividend is referred to in Section 115-O of the Act, it will be exempted from tax under Section 10 (34) of the Act. 41. The Bombay High Court, in a decision in the case of PCIT V. Smt. Kayan Jamshid Pandole reported in (2018) 100 Taxmann.com 284 had held as follows: 2. Following questions are presented for our consideration: (a) Whether on the facts and in the circumstances of the case and in law, the Hon'ble Income-tax Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome by way of dividend referred to Section 115-O. As per Sub-section (1) of Section 115-O notwithstanding anything contained in the provisions of Act and subject to the provisions of the said section in addition to the income tax chargeable in respect of the total income of the domestic company, any amount declared, distributed or paid by such company by way of dividend on or after 1st April, 2003 would be chargeable to additional income tax referred to as tax on distributed profits. 10. The question would be whether the deemed dividend under Section 2(22)(d) would fall within the purview of Sub- Section 1 of Section 115-O of the Act. However, the legislature has advisedly cleared this position by providing an explanation to Section 115-Q of the Act. Before we refer to the explanation, Priya Soparkar 7 7 itxa 387-16-o we may note that Section 115-Q provides that if any Principal Officer of domestic company and a company does not pay tax on distributed profits in accordance with the provisions of Section 115- O then he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of the Act for col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he impugned order of the Settlement Commission is deemed to be violative of the statutory provisions and therefore illegal. 43. The learned Standing counsel for the Department submitted that the decision of the Bombay High Court in Kayan Jamshid Pandole (supra) is distinguishable on facts. I am unable to endorse such a submission. A plain reading of paragraphs 8 to 11 of the said decision reveals that the Bombay High Court had laid down the proposition of law that dividend referred therein, is not taxable, without reference to the facts of that case. Hence it cannot be said that the findings therein could to be distinguished, by applying the facts of that case. WHETHER THE PROVISIONS OF Section 2(22)(E) CAN BE APPLIED FOR THE ASSESSMENT YEARS WHERE THERE ARE MORE THAN TWO SHAREHOLDERS? 44. The learned Senior counsel for the petitioner had raised a further ground stating that when there are more than one shareholder having substantial interest in RTPL for the assessment years 2012-13 and 2013-14, the provisions of Section 2(22)(e) cannot be applied for those years as the computation mechanism fails. The Department had accepted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l presently show, to refer to certain other sections of the head capital gains . Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by Section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by Section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the Income Tax Act, where under each head of income, the charging provision is accompanied by a set of provisions for computing the income subject to the charge. The character of the computation provisions in each case bears the relationship to the nature of the charge. Thus, the charging Section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all it is evident that s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose. When such point is not prescribed, either by the statute or by the statutory delegate, no compliance is possible with Section 15. The single point at which the tax may be imposed must be definite ascertainable point so that both the dealer and the sales tax authorities may know clearly the point at which the tax is to be levied. 50. The learned Senior counsel for the petitioner contended that even assuming that the amount advanced for the first time by RSPL to RTPL is treated as deemed dividend, any transfer of money by RTPL to RSPL and subsequent repayment by RSPL to RTPL thereafter should not be taxed as 'deemed dividend'. As such by adjusting such payments by RTPL to RSPL, the deemed dividend ought to have been limited to ₹ 35,47,20,422/- as against ₹ 137,19,75,000/-. Opposing such a contention, the learned Standing counsel for the respondent submitted that even when an advance of loan is subsequently repaid in its entirety during the relevant years, still deemed dividend is applicable. In support of such a contention, the learned counsel placed reliance of the decisions in Smt. Tarulata Shyam V. CIT [ (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loan is borrowed by the member/shareholder. For better clarity, the relevant portion of the order is quoted hereunder :- It is clear from the above cited passage that if a controlled company adopted a device of making a loan or advance to one of its shareholders such a shareholder would be deemed to have received the said amount out of the accumulated profits and would be liable to pay tax on the basis that he had received the said loan by way of dividend. Whether the loan is ultimately repaid to the company or not is immaterial. This decision would seem to answer all the contentions raised by Mr. Choudhury against the assessment of the amount as dividend. Further, as pointed out by both the Accountant Member and the President of the Income-tax Appellate Tribunal, neither the Bombay High Court nor the Madras High Court, who had also an occasion to consider this question, had any doubts that the liability to tax attached as soon as the loan was taken from the company. For instance, in the Madras case of K. M. S. Lakshmana Aiyar v. Additional Income-tax Officer, it was observed that under section 2(6A)(e) a loan or advance by a controlled company to its shareh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of section 23A as it stood in the year in which the loan was advanced. The second condition is that the borrower must be a shareholder at the date when the loan was advanced ; it is immaterial what the extent of his shareholding is. The third condition is that the loan advanced to a shareholder by such a company can be deemed to be dividend only to the extent to which it is shown that the company possessed accumulated profit at the date of the loan. This is an important limit prescribed by the relevant section. The fourth condition is that the loan must not have been advanced by the company in the ordinary course of its business. In other words, this provision would not apply to cases where the company which advances a loan to its shareholder carries on the business of money lending itself ; and the last condition is that the loan must have remained outstanding at the commencement of the shareholder's previous year in relation to the assessment year 1955-56. (Emphasis supplied). The first four conditions factually exist in the instant case. The last condition is not applicable because it was a transitory provision app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resulting from the distribution of dividend. 19. In such a backdrop, the above provision came to be inserted so as to make any payment made by the company by way of advances and loans to shareholders, who satisfy certain conditions, as enumerated above, to fall under the head dividend as defined under Section 2 (22) (e) of the Income Tax Act. In the case on hand, the assessee/appellant having received the above amount from KIPL under the head loans and advances as shown in the books of accounts of KIPL, the five ingredients, as propounded by the Supreme Court in Tarulata Shyam's case (supra) to bring the said amount under the ambit of dividend are wholly satisfied in the present case and the four parameters, as enumerated by the Assessing Officer, are also squarely attracted to the case of the assessee herein. Therefore, any amount paid to the assessee by the company during the relevant year, less the amount repaid by the assessee in the same year, should be deemed to be construed as dividend for all purposes. 20. However, in the case on hand, the Assessing Officer has taken the entire amount of ₹ 76,86,829/= received by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as no incriminating material in relation to deemed dividend found during the search and accordingly, no addition can be made under Section 2(22)(e). The said contention was taken note of by the Settlement Commission in paragraph 7.2 of its order but however, had failed to address the issue. 56. The Hon'ble Division Bench of the Bombay High Court in CIT V. Continental Warehousing Corporation Ltd [ (2015) 374 ITR 645 (Bom)] held that the power under Section 153A cannot be routinely exercised in the absence of any incriminating material during the search. In CIT V. Kabul Chawla (2016) [380 ITR 0573 (Delhi)] , it was held that since no incriminating material was unearthed during the search, no additions could have been made to the income already assessed. The jurisdiction of such assessment is to assess what is found during the search and thus, there has to be some incriminating material found during the course of search. As stated earlier, the petitioner had submitted before the Settlement Commission during the course of search under Section 132 of the Act that no fresh incriminating material with respect to the deemed dividend was found. Unfortunately, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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