TMI Blog2023 (8) TMI 418X X X X Extracts X X X X X X X X Extracts X X X X ..... ion opportunity was granted to the assessee. Since the Assessing Officer has relied heavily on the statement recorded from the exit operators. Decided in favour of assessee. Thus overall facts on record and the nature of transaction clearly indicate that this transaction basically falls under the category of penny stock and assessee has not proved basic information why he has invested in the company which does not have any net-worth and no financial activities. Without actually satisfying the onus for such investment, merely relying on non-availing of the opportunity for cross examination which is subsequent development, the assessee cannot claim benefit. Decided against assessee. Deemed Dividend addition u/s 2(22)(e) - Inter-corporate deposit - HELD THAT:- It is clear the MMPL has given Inter-corporate deposit to MIDL in which assessee is a common share holder along with his wife and from the record it is very clear that the ICD was given to another sister concern and the tax authorities has not brought on record how this transaction will benefit the assessee. As decided in Jateen Madanlal Gupta [ 2021 (2) TMI 177 - ITAT AHMEDABAD] loans and advances were made as inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the beneficiaries has been detailed in the above said investigation report. He has discussed in detail the various aspects of claim of benefit under penny stock in Page Nos. 3 to 5 of the Assessment Order and further, he has specifically discussed the financials of the TTL the scrip under consideration in his order at Page No.5. He observed from the chart that net worth of the above company is negligible and even though the net-worth of the company and business activity of the company is negligible the shares prices have been artificially rigged by the group of operators to accommodate beneficiaries seeking long term capital gain and losses. Further, he observed that the assessee has sold the shares to the exit providers namely Rinam Dealmark Pvt. Ltd., and Diganta Properties Pvt. Ltd., and all these entities are based in Kolkata, with the above observations assessee was asked to show cause as to why these transactions of assessee should not be treated as bogus. 5. In response assessee by relying on various case laws submitted that assessee had purchased 25000 equity shares of TTL (old name: Omnitech Petroleum Ltd.) for ₹. 2,50,000/- through a broker Skunk Tradelink Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to submit that provision of Section 2(22)(e) of the Act cannot be invoked merely on the premise that the common shareholders having more than 10% of shareholding in the assessee company and having substantial interest exceeding 20% shareholding in the associate concern. It is an admitted fact that the common shareholders are registered and beneficial shareholder both the companies having significant interest. For invoking Sec. 2(22) (e) it is necessary to establish that in respect of any of the transaction in the nature of advance or loan that the benefit has directly or indirectly accrued to the eventual shareholder, who is entitled to receive the dividend. Share Holding Pattern of Common Shareholders: SI. No Name of the shareholder Madhu India Deco Ltd. Percentage holding Madhu Matter Pvt Ltd., Percentage holding 1. Mr. Anand M Gupta 115920 50.84% 5098 19.61% 2. Mrs. Madhu A. Gupta 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,50,00,000/- has already been added to the income of the recipient of ICD, MIDL in the assessment order and set off against the loss for the year. We attach herewith in Annexure 10 a copy of the assessment order highlighting the addition to the income. Under these circumstances taxing the same income in the hands of the assessee will amount to double taxation of same income once in the hands of MIDL second time in hands of the assessee. This double taxation of same income is not tenable and justified .. . 8. After considering the submissions of the assessee, Assessing Officer rejected the same and observed that it is undisputed fact that the assessee is holding more than 10% in both the companies. Further, assessee holds more than 20% of shares holding pattern, in the company wherein the loan is received. Accordingly, provisions of section 2(22)(e) are attracted and hence an amount of ₹. 1.5 crores is added to the total income of the assessee under the head income from other sources . 9. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and with regard to addition u/s. 69 of the Act assessee filed detailed submissions along with the various supporting doc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed detailed submissions before the Ld.CIT(A) and for the sake of clarity it is reproduced below:- 3) Addition of Deemed Dividend u/s. 2(22)(e) of the Income Tax Act, 1961 The learned AO has erred in addition of Rs. 1,50,00,000/- as Deemed Dividend u/s. 2(22)(e) of the Income Tax Act, 1961 under the head Income from Other Sources on the ground that the assessee holds more than 10% in both the Companies and more than 20% of the share holding pattern in the company in which the loan is received. The learned A.O also erred in adding 100% of the deemed dividend in the hands of the assessee even though his shareholding in the beneficiary company was 50.84% 3.1) Facts The Inter Corporate Deposit of Rs. 1,50,00,000/- was given by Madhu Mattor Private Limited (MMPL) [Lender) to Madhu India D cor Limited (MIOL). The appellant is a director of M/s Madhu India Deco Ltd and M/s Madhu Mattor Pvt. Ltd. holding substantial interest @50.84% and 19.86% respectively. It is a company in which public are not substantially interested. M/s Madhu India Deco Ltd and M/s Madhu Mattor Pvt. Ltd are Group Companies having common shareholders and directors and are therefore regarded as rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual shareholder, who is entitled to receive the dividend. iii) From the perusal of the shareholding pattern it is seen that the common shareholders being Promoters/Directors hold more than 20% in both the companies but Madhu India Deco Limited (MIDL) does not hold any single share in Madhu Mattor Private Limited (MMPL) a lending Company. Thus the ICD placed by MMPL in MIDL is not in the nature of Loan or Deposit given to its registered Shareholder. MIDL is not a shareholder in MMPL. iv) During the previous year relevant to the assessment year under consideration MMPL has utilized its surplus funds to deploy in ICD with MIDL as a part of its financing activity during the normal course of business. This is evident from the attached Cash Flow Statement of MMPL for the relevant period v) Furthermore, from the perusal of the details of utilization of the ICD placed by MMPL in MIDL,it can be seen that the entire ICD amount has been utilized by MIDL for retirement of the trade dues. No part of the ICD has been diverted, utilized or accrued to the ultimate common shareholders being the Promoters/Directors of MIDL MMPL. Thus it is clearly established that no part of the ICD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thers 35 0.035% -- --- Total 228000 100 25992 100 3.6.4) On perusal of the above chart, your Honour would appreciate that even though the MMPL and MIDL have common shareholders. MIDL does not hold any beneficial shareholding in MMPL. 3.6.5) As per section 2(22)(e), dividend includes any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or 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 ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommon shareholders being the Promoters/Directors of MIDL MMPL. Thus it is clearly established that no part of the ICD has directly or indirectly accrued to the eventual shareholder, who is entitled to receive the dividend. If the definition of Dividend is extended to a loan or advance to a non shareholder the ordinary and natural meaning of the word dividend is taken away. In the light of the intention behind the provisions of Sec. 2 (22) (e) and in the absence of indication in section 2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder also, it is submitted that loan or advance to a non-shareholder cannot be taxed as deemed dividend in the hands of a non-shareholder. 3.6.9) In this regard reliance is placed on the following Judicial Decisions confirming that the Loans given to Non - Shareholder cannot be treated as Deemed Dividend within the meaning of Section 2(22)(e). Bombay High Court in case of CIT vs. Jignesh P. Shah ITA No.197/2013 [2015-ITRVHC-MUM-108] has held that the provision of section 2(22)(e) cannot be invoked unless the assessee itself is the shareholder of the company, who was lending money to him. Delhi High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as advance payment or Loan or advance within the meaning of Sec.2(22)(e) of the Act. The term loan has not been defined under the provisions of the Act. Hence, meaning of the term loan as provided in various judicial precedents would have to be referred to for determining whether a deposit can be considered akin to loan . The term loan is distinct from the term deposit as analyzed in following judicial precedents. Seamist Properties P. Ltd vs. ITO (95 TTJ 201) (Mumbai ITAT) wherein the assessee had accepted a security deposit under Memorandum of Understanding with the lending company for carrying on a new business. Both companies had common shareholders, holding shares exceeding the limits specified in Section 2(22)(e) of the Act. The. ITAT held that the amount of deposit could not be taxed as deemed dividend in the hands of the assessee company since it was not a loan. Madhya Pradesh High Court in the case of Sharda Talkies (Firm) vs. Smt. Madhulata Vyas (AIR 1966 MP 68) observed as under: There is a subtle distinction between a deposit and a loan. In the case of a loan, the amount is given by the creditor to the debtor at the request of and for the requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s/advances. Section 2(22) (e) enacts a deeming fiction whereby the scope and ambit of the word dividend has been enlarged to bring within its sweep certain payments made by a company as per the situations enumerated in the section. Such a deeming fiction would not be given a wider meaning than what it purports to do. The provisions would necessarily be accorded strict interpretation and the ambit of the fiction would not be pressed beyond its true limits. The requisite condition for invoking section 2(22)(e) of the Act is that payment must be by way of loan or advances. Since there is a clear distinction between the inter- corporate deposits vis-a-vis loans/advances, according to us the authorities below were not right in treating the same as deemed dividend under section 2(22)(e) of the Act. Further more in the case of M/s IFB Agroind Ltd. Vs JCIT-ITA no. 114/Kol/2013 Kolkata ITAT the following was held: The provisions of section 2(22)(e) of the Act refers to only 'loans' and 'advances' it does not talk of a 'deposit'. The fact that the term 'deposit' cannot mean a 'loan' and that the two terms 'loan' and the term ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Singh (2015) 231 Taxman 731 (P H)(HC) Assessee was a substantial shareholder in a company. Company received certain export orders but was not in a position to execute these orders as its manufacturing facility was situated in a remote area and was beset with labour problems and erratic supply of electricity. Company, therefore, entered into an agreement with assessee to install plant and machinery at premises of assessee to enable assessee to do job work for company. Assessee also received certain sum as advance from said company to do job work at interest rate below prevailing market rate. Tribunal found that advances were received by assessee in normal course of business as a matter of business expediency and, hence, said advance was not covered by section 2(22) (e). On appeal by revenue the Court held that finding of facts recorded by Tribunal could not be interfered with. Dy. CIT .v. Chariot International P. Ltd. (2014) 29 ITR 36 (Chennai)(Trib.) The assessee was 100% EOU engaged in the business of conversion of rough granite blocks into polished granite slabs, granite tiles and monuments. During the assessment proceedings, the AO found that 2 individuals S and V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of MIDL second time in hands of the appellant. This double taxation of same income is not tenable and justified. It is also observed that Ld. AO erroneously mentioned the percentage holding of the appellant in MMPL at 79.04% as against 19.61% held by the appellant. Without prejudice to our above contention, in any event entire deemed dividend couldn't be taxed in the hands of the appellant. 12. After considering the detailed submissions of the assessee Ld.CIT(A) dismissed the ground raised by the assessee with the following observations: - 5.3.4 The appellant has argued that the advances made was in the nature of inter corporate deposit and hence, not subject to provisions of Section 2(22)(e). The appellant has relied on plethora of decisions that have held that inter corporate deposits are not covered within Section 2(22)(e), however appellant has failed to furnish how the same in the nature of inter corporate deposit. It is the preliminary obligation of the appellant to discharge the onus of proving its contention. In the absence of the appellant complying with the basic requirement, the argument of the appellant is not tenable. 5.3.5 The appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns including jurisdictional Bombay High Court relied by the appellant in this regard. Addition confirmed of Rs. 1,50,00,000/- u/s. 2(22)(e), is bad in law and needs to be deleted. c. Without prejudice to the above and without admitting, on the facts and circumstances of the case and in law, Ld CIT(A) erred in confirming the addition of Rs. 1,50,00,000/- by holding that the transaction of loan or advance made by MMPL to MIDL is covered within the ambit of section 2(22)(e) of the Act. Addition made, ignoring the fact that no part of ICD has directly or indirectly accrued to the shareholders, is bad in law and needs to be deleted. d. Without prejudice to the above and without admitting, on the facts and circumstances of the case and in law, Ld CIT(A) erred in confirming the addition of Rs. 1,50,00,000/- in the hands of appellant inspite of fact that the same addition is already made in the hands of recipient of ICD i.e. MIDL. e. Without prejudice to the above and without admitting, on the facts and circumstances of the case and in law, 100% addition of deemed dividend made in the hands of appellant even though his shareholding in the beneficiary company was 50.84 percen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the share broker by BSE or SEBI. The scheme of arrangement of merger of TTL with Omnitech was sanctioned by the Honorable Bombay High Court. The Company had allotted the shares in TTL to the appellant pursuant to merger on January 15, 2014 after getting the requisite approval from BSE Registrar of Companies. Company had filed the requisite forms / documents with BSE Registrar of Companies and got the approval of Name Change on dated March 28, 2014, thus the company OMNITECH PETROLEUM LIMITED is now known as TRINITY TRADELINK LIMITED [TTL). As a result of implementation of merger Scheme Company's share price shot up abruptly and peaked due to better future prospects. The Company is still traded on Mumbai Stock Exchange and there was never any reported suspension in trading due to SEBI or BSE investigation. Appellant had no control over the abnormal rise in price and had capitalized on the substantial appreciation opportunity, that too only in respect of 2850 shares out of total shareholding of 60,000 shares. If the transaction were of bogus nature for some extraneous consideration, the appellant would have sold the entire holding. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT(A) has relied on the observations made by the learned AO at para 9 and 10 of the assessment order. 13.2. The learned CIT(A) at para 5.2.4, page 36 of his order accepted that the appellant has sufficiently documented the said transaction of purchase and sale. However, the learned CIT(A) held that the said issue needs to be seen from the perspective of human probabilities and relied on the following decisions. Sumati Dayal 214 ITR 801 (SC) - Para 5.2.7, page 37 of the CIT(A) Order. Shamim Imtiaz Hingora vs ITO (ITA No. 1875/Pune/2018) Para 5.2.8, . pages 37 and 38 of the CIT(A) Order. 13.3. The learned CIT(A) has relied on the following decision for not allowing cross examination. Pankaj Agarwal Sons (HUF) vs ITO (ITA No. 413/Chennai/2018) Para 5.2.6, page 38 of the CIT(A) order. Appellant's submissions: 14. The appellant relies on the submissions made during the assessment and first appellate proceedings wherein complete details with documentary evidences regarding the said transaction of capital gains was submitted. 15. Copy of the Investigation Report issued by DIT (Inv.) Kolkata relied on by the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 68 has been deleted. ITO vs M/s Stuti Welfare Trust I.T.A No. 1508/Kol/2017 dated 24.10.2018 Swati Mall vs ITO I.T.A No. 2423/Kol/2017 dated 07.12.2018 Sanjay Mehta vs ACIT ITA No.1089/Kol/2018 DCIT vs Shri Ghanshyam Agarwal ITA No. 532/JP/2019 Seema Tayal vs ITO (ITA No. 1132 of 2018 Del) 22. Reliance is placed on following other decisions wherein additions relating to bogus capital gains has been deleted. ITA No. 3801/Mum/2011 Ms. Farrah Marker Vs. Income Tax Officer 19(3)(1) M/s Indravadan Jain HUF AND ITA No.5168/Mum/2014 AY :2005-2006) Manish Kumar Baid vs. ACIT, (I.T.A. No1236/Kol/2017 dated 18-08-2017 CIT v. Shyam R. Pawar [2015] 54 taxmann.com 108 (Bombay) CIT vs Smt. Sumitra Devi [2014] 49 taxmann.com 37 (Rajasthan) CIT vs Ms. Arvind Kumar Jain HUF, ITA No. 4862/Mum/2014 dated 18.09.2017 23. Cross examination decisions. Reliance is placed on following decisions:- Smt. Sunita Dhadda v. DCIT [2013] 33 taxmann.com 639 (Jaipur-Trib) Dept's appeal in above case to Rajasthan High Court and SC were dismissed Andaman Timber Industries vs CCE [2015] 62 taxmann.com 3 (SC) CIT vs M/s. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27. The ICD of Rs 1.50 cr is disclosed in the audited financials of both the companies as Related Party Transactions under AS 18 as they are group concerns. 28 During the course of assessment proceedings in the case of the appellant, the appellant had given a detailed submissions vide letter dated 19.12.2016 (enclosed at 46 to 52 pages of the Pb) for non-applicability of the provisions of section 2(22)(e). Similar submissions were also made during the assessment proceedings of MIDL vide letter dated 19.12.2016 29. The learned AO disregarded the submissions of the appellant and made additions u/s 2(22)(e) vide para 11.5, page 14 of the assessment order. 30. Similar additions were also made on protective basis during the assessment of MIDL vide para 5.7, pages 8 9 of the assessment order Briefly three reasons are given for the said additions: a) The learned AO has placed reliance on CBDT Circular no. 495 dated 20.09.1987 which provides for taxing the same in the hands of recipient concern and not the shareholder. b) Amount is already deposited in the bank account of MIDL and any subsequent defalcation of funds is extraneous to the application of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled in the event of liquidation to participate in the surplus assets (ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalized profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965; (ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off Non-applicability of section 2(22)(e) in the case of ICD AND business expediency. 35. It is important to understand that the term loans and advances in section 2(22)(e) does not cover within its ambit deposit 36. The Hon'ble Supreme Court in the case of Gopal and Sons (HUF) v. CIT [2017] 77 taxmann.com 71/245 Taxman 48/391 ITR 1 noticed the aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to Rs 181.24 lakhs which is deployed in placing ICD amounting to Rs 150 lakhs (See para C - 'Cash flow from Financing Activities' in the said cash flow statement. 3. The depositor safeguards the deposit by ensuring specific use of the said funds which has commercial expediency as well. a) Details of the utilization of the said ICD by MIDL is given at page 81 of the paper book. b) It can be seen that it has been utilized to pay outstanding credit balance arising out of purchases made from MMPL by MIDL. (page 82 to 84 of the pb) 40. Copy of tax audit reports of MMPL and MIDL are enclosed herewith at pages 41 44 of the pb submitted in the case of MIDL it shows that there are business transactions between MMPL and MIDL in the form of purchases of Rs 2,61,71,447/- by MIDL from MMPL, and sale of Rs 2,28,28,863/- by MIDL to MMPL throughout the year. Thus your Honours will appreciate that said ICD is given in the course of the business of the MMPL and MIDL. Infact the entire proceeds of ICD is also utilized by MIDL to repay outstanding bills on account of purchases made by MIDL from MMPL. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly MIDL cannot be subject to tax u/s 2(22)(e) as it is not registered and beneficial shareholder 46. The following conditions are required to be satisfied for application of the above category of payment to be regarded as dividend (a) There must be a payment to a concern by a company (b)A person must be shareholder of the company being a registered holder and beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power. This is because of the expression Such Shareholder' found in the relevant provision. This expression only refers to the shareholder referred to in the earlier part of section 2(22)(e), viz., a registered and a beneficial holder of shares holding 10 per cent voting power (c) The very same person referred to in (b) above must also be a member or a partner in the concern holding substantial interest in the concern. 47. As mentioned earlier, the appellant i.e. Shri Anand Gupta does not obtain any benefit arising out of the said ICD being given by MMPL to MIDL as entire amount is used by MIDL to repay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied on the following case laws: i. Shri Sahir Sami Khatib v. ITO [2018] 98 taxmann.com 453 (Bombay) ii. ACIT v. Jasubhai Engineering (P.) Ltd., [2020] 118 taxmann.com 430 (Mumbai Trib.) 17. Considered the rival submissions and material placed on record, with regard to addition made u/s. 69 of the Act, we observe that assessee has claimed long term capital gain exemption u/s. 10(38) of the Act on the scrip Sharp Trading Company (Scrip Code 512417). The above shares were purchased of Omnitech Petroleum Ltd/sharp Trading Company now present name is TTL. These shares were purchased through broker Skunk Tradelink Limited and these transactions are off market transactions and subsequently these shares were dematerialized and number of shares held by the assessee became 60000. During the current assessment year assessee sold 1500 and 1350 shares for a total consideration of ₹. 27,99,270/-. Assessee held these shares for more than one year and claimed the capital gain earned through this transaction of ₹. 15,50,220/-. As per the facts on record, we observe that assessee has filed all the documents relating to these transactions meticulously and sold these shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee and Ld.DR, we observe that on similar facts Ahmadabad bench of the ITAT decided the issue in the case of DCIT v. Jateen Madanlal Gupta [2021] 126 taxmann.com 20 (Ahmedabad Trib.) and the relevant facts and decision are reproduced below:- 9. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, the assessee is a shareholder and carrying voting rights not less than 10% in the company namely JP infrastructure Pvt. Ltd. Similarly the assessee is also holding substantial interest in other entities/companies namely Dev Infratrade Pvt. Ltd. and Gujarat mall Management Company Pvt. Ltd. respectively. Accordingly, the AO in the case on hand has treated the amount of Rs. ₹2,62,33,800/- as deemed dividend in the hands of the assessee on the reasoning that the transactions of advancing loan to the companies as discussed above falls within the purview of the provisions of section (2)(22)(e) of the Act which has been elaborated and discussed in the preceding paragraph. However, the learned CIT (A) was pleased to delete the addition made by the AO for the reasons as discussed in the aforesaid paragraphs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e) of the Act. But the Hon ble Gujatrat High Courts in his case reported in 116 taxmann.com 426, has held that to apply the provision of section 2(22)(e) there must be personal benefit arises to the assessee out of such loan and advances. The relevant finding of the Hon ble Court is reproduced as under: any payment made by a company in which a shareholder has shareholding exceeding 10 per cent of the voting power to any concern in which such shareholder has substantial interest, would be deemed to be dividend in his hands if any benefit from such transaction has been received by such shareholder. The intention of the legislature is to tax funds ultimately received by a shareholder holding more than 10% voting power in the company, which have been routed through different modes/concerns. What needs to be taxed as deemed dividend is the amount ultimately used for the benefit of the shareholder. It is not the case of the Assessing Officer in the reasons recorded for reopening the assessment that the petitioner has received any amount as holder of substantial shares from the loan giver company or the loan receiver company. Therefore, in the absence of any benefit having been recei ..... X X X X Extracts X X X X X X X X Extracts X X X X
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