2019 (11) TMI 1142 - HC - Income Tax

Court Allows Writ Against Settlement Commission Order: Deemed Dividend Exemption & Refund

R. Chitra Versus The Vice Chairman, The Principal Commissioner of Income Tax, The Deputy Commissioner of Income Tax

R. Chitra Versus The Vice Chairman, The Principal Commissioner of Income Tax, The Deputy Commissioner of Income Tax - [2019] 418 ITR 530 (Mad) Issues Involved:1. Maintainability of the Writ Petition against the order of the Settlement Commission.2. Relevance and validity of CBDT Circulars.3. Whether deemed dividend is taxable in the hands of the shareholders or the concern.4. Whether dividend is taxable under Section 10(34) of the Income Tax Act.5. Applicability of Section 2(22)(e) for assessment years with more than two shareholders.6. Validity of proceedings under Section 153A r/w. 153C without incriminating material.Detailed Analysis:1. Maintainability of the Writ Petition:The Court addressed the preliminary objection regarding its jurisdiction under Article 226 to deal with the Settlement Commission's order. The Court cited the Supreme Court's decision in *Jyotendrasinhji vs. S.I. Tripathi* and others, which allows interference if the order is contrary to the provisions of the Act and prejudices the petitioner. The Court concluded that the Writ Petition is maintainable as the petitioner argued that the Commission's order was not in accordance with the Act.2. Relevance and Validity of CBDT Circulars:The petitioner relied on Circular No. 19 of 2017 and Circular No. 495 of 1987, arguing that deemed dividend under Section 2(22)(e) should not apply to commercial transactions. The Court noted that CBDT circulars are binding on the revenue authorities, even if they deviate from the strict interpretation of the law, as established in *UCO Bank vs. CIT*. The Court found that the transactions between RSPL and RTPL were in the ordinary course of business and thus, the circulars applied, exempting these transactions from being treated as deemed dividends.3. Taxability of Deemed Dividend:The Court discussed the conflicting views on whether deemed dividend is taxable in the hands of the shareholder or the concern. The Court referred to the pending larger bench decision in *National Travel Services* and concluded that, based on the binding nature of CBDT Circulars, deemed dividend is not taxable in the hands of the shareholders.4. Taxability of Dividend under Section 10(34):The Court analyzed Sections 10(34), 115-O, and the explanation to 115Q, concluding that dividend, including deemed dividend under Section 2(22)(e), is exempt from tax under Section 10(34). The Court cited the Bombay High Court's decision in *PCIT vs. Smt. Kayan Jamshid Pandole*, which held that the exemption applies even if the company has not paid the dividend distribution tax, as long as the statute does not explicitly withdraw the exemption.5. Applicability of Section 2(22)(e) with Multiple Shareholders:The Court noted that for the assessment years 2012-13 and 2013-14, there were more than one shareholder with substantial interest in RSPL and RTPL. The Court concluded that the computation mechanism of Section 2(22)(e) fails when there are multiple shareholders, making the provision inapplicable for those years.6. Validity of Proceedings under Section 153A r/w. 153C:The Court found that no incriminating material related to deemed dividend was found during the search, making the proceedings under Section 153A r/w. 153C invalid. The Court cited *CIT vs. Continental Warehousing Corporation Ltd* and *CIT vs. Kabul Chawla*, which held that additions cannot be made without incriminating material found during the search.Conclusion:The Court quashed the Settlement Commission's order regarding the determination of deemed dividend as the petitioner's income for the assessment years 2009-2010 to 2013-2014, allowing the petitioner to claim a refund of any tax paid pursuant to the impugned order. The Writ Petition was allowed, and the connected Miscellaneous Petition was closed with no costs.