TaxTMI 
TaxTMI 
2010 (4) TMI 871
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....2008 raised common grounds as follows : "1.The CIT(A) erred both on facts and in law insofar as it is prejudicial to the assessee. 2.The Assessing Officer erred in passing orders under sections 201(1) and 201(1A) beyond the period of two years from the end of the assessment year. 3.The CIT(A) erred in holding that the provisions of section 194 is applicable to the amounts advanced to Marc Manufacturers (P.) Ltd. 4.The CIT(A) erred in holding that advances made to MMPL comes within the purview of provisions of section 2(22)(e). 5.The CIT(A) erred in holding that the repayments by MMPL cannot be considered while computing deemed dividend under the provisions of section 2(22)(e). 6.The CIT(A) erred in holding that deferred tax also should be considered while considering the reserves and surpluses for the purposes of working out deemed dividend without appreciating the fact that deferred tax is a provision against future liability and cannot be considered as accumulated profit. 7.The CIT(A) erred in holding that amounts paid against supplies also has to be considered for dividend without appreciating the fact that such amounts are considered by MMPL as trading rece....
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....ves to hold the amount advanced as deemed dividend under section 2(22). 5.The CIT(A) failed to appreciate the fact that dividend can be taxed only in the hands of a shareholder and thereby erred in confirming the action of the Assessing Officer assessing deemed dividend in the hands of the assessee though it is not a shareholder of the company which advanced the amounts." 5. Brief facts of the case in assessee's appeals in ITA Nos. 1162, 1163 and 1166/Hyd./2008 and in Revenue appeals in ITA Nos. 1002 to 1004/Hyd./2008 are that a survey under section 133A was conducted in the case of the assessee during the survey it was noticed that the assessee is a closely held company reporting substantial profits. It was also noticed that the company had transferred huge amounts as loans to a sister concern, named Marc Manufacturers (P.) Ltd. (MMPL) year after years. It was also found that majority of the shareholders in both the companies are common. After verifying the books the Assessing Officer found that the following amounts had been transferred by the assessee-company to MMPL in the financial years 2002-03 to 2004-05 relevant to assessment years 2003-04 to 2005-06. Financial Yea....
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....the provisions of section 2(22)(e) would not apply. (b)They were under bona fide impression that the amount given to MMPL is not income in the hands of MMPL and hence there was no obligation on its part to deduct tax at source from such payments. (c)Provision of section 194 will not attract since the payee i.e., MMPL is not a shareholder in the assessee-company. (d)On the date of advance the loan, there are no accumulated profits. (e)The amounts in question are deposits and not loans and hence, the provisions of section 2(22)(e) will not be applicable. 5.4 However, the explanation submitted by the assessee was not accepted by the Assessing Officer. As regards the first contention, the Assessing Officer held that after amendment to section 2(22)(e) with effect from 1-4-1988, the scope of shareholder has been enlarged and the argument of the assessee is no more valid. The Assessing Officer referred to the decision of ITAT, Hyderabad in the case of Hyderabad Chemical Products v. ITO [2000] 72 ITD 323 , wherein it was held that even though the payee company was not a direct shareholder in the payer company, but in view of the amended provisions of section 2(22)(e), the l....
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.... Further, the Balance Sheet, the outstanding amount has been shown under the head 'loans and advances'. Similarly, in the Balance Sheet of MMPL (the payee), the amount was shown under the head 'unsecured loans'. The Assessing Officer referred to the note to the Auditor's Report in the case of the payee company, wherein, it was stated that the company did not accept any deposits. On the other hand there was clear reference in the Audit Report for financial years 2002-03, 2003-04, and 2004-05 of the assessee-company that it had given unsecured loan to companies under the same management. Similar reference was also there in the Auditor's Note to the audited accounts of the payee company (MMPL). The Assessing Officer also observed that section 2(22)(e) refers not only to loan and advance but also to any payment and hence, the assessee's case clearly fits into the provision of section 2(22)(e) of the Act. 5.8 Thus, after considering all the objections raised by the assessee the Assessing Officer came to the conclusion that the amounts given by the assessee-company to MMPL in the financial years 2002-03, 20003-04 and 2004-05 are Deemed Dividend on which the assessee should have deduct....
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....dering depreciation as provided in the books of account without considering depreciation as per Income-tax Act. There is also dispute regarding the inclusion of deferred tax reserve within the reserve surplus which is considered as part of accumulated profit. Further, the assessee contended before CIT(A) in view of the Explanation 2 below clause (e) of sub-section (22) of section 2, the day-to-day accumulated profit to be considered. The CIT(A) rejected this ground placing reliance on various orders of Tribunals as well as Bombay High Court by holding that even on the date of credit entries for the 'off loading amount', the balance in the account of MMPL (the payee) were showing debit balance thus the payments made by the assessee to MMPL are still to be treated as advance within the ambit of section 2(22)(e) of the Income-tax Act. The assessee is in appeal before us on the issue relating to invoking the provisions of sections 201 and 201(1A) on the reason that the provisions of section 194 is applicable on advance made to MMPL comes within the purview of provisions of section 2(22)(e). The assessee is also disputed before us the issue relating to computation of accumulated profit ....
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.... dated 20-12-2006. From the facts, it is seen that M/s Marc Manufacturers is not a shareholder in MTAR Technologies (P.) Ltd. It is only two directors of the assessee are the shareholders of MTAR Technologies (P.) Ltd. For better appreciation, the relevant provisions of section 2(22)(e) are extracted as under : 'Any payment by a company, not being a company in which public are substantially interested, of any sum whether as representing a part of the assets of the company or otherwise made after the 31st of May, 1987 by way of advance or loan to a shareholder, being a person who is the beneficial owner whether with or without a right to participate in profits, holding not less than 10 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 shareholders, to the extent to which the company in either case possess accumulated profits.'" The Mumbai Bench of the Tribunal in ITA No. 6182/Mum./2008 considered the similar issue as under : "6. We have h....
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....hareholder viz., the concern. 36. The definition of 'Dividend' under section 2(22)(e ) of the Act is an inclusive definition. Such inclusive definition enlarges the meaning of the term 'dividend' according to its ordinary and natural meaning to include even a loan or advance. Any loan or advance cannot be dividend according to its ordinary and natural meaning. The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word 'dividend' is extended to loans and advance to a shareholder or to a concern in which a shareholder is substantially interested deeming them as dividend in the hands of a shareholder the ordinary and natural meaning of the word 'dividend' is altered. To this extent the definition of the term 'dividend' can be said to 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 section 2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder cannot be taxed as deemed dividend in the hands of a non-shareholder.' 8. The Hon'bl....
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....r No. 495 dated 22-9-1987 issued by the CBDT reported in 168 ITR (Statutes) 87. In the said circular the intention of introducing clause (e) of sub-section (22) of section 2 is mentioned. An extract of the said circular is given below : 'With the deletion of sections 104 to 109 there was a likelihood of closely held companies not distributing their profits to shareholders by way of dividends but by way of loans or advances so that these are not taxed in the hands of the shareholders. To forestall this manipulation, sub-clause (e), clause (22) of section 2 has been suitably amended.' 5. It can be seen from the circular that the provisions of amended section 2(22)(e) are to be applied only to the payments made to the shareholders and not to any other person or concern other than shareholders. The Allahabad High Court in the case of CIT v. H.K. Mittal 219 ITR 420 held that the chief ingredient of dividend as defined in sub-clause (e) of clause (22) of section 2 of the Act is that the recipient should be a shareholder on the day the loan was advanced. If that fact is not established, there cannot be a deemed dividend. Therefore, the provisions of section 2(22)(e) cannot be applie....
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....sides the above explanation, the assessee also submits that the provisions of Income-tax Act for deduction of tax at source in respect of the dividend are contained in section 194 which reads as under : 'Dividends : The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall before making any payment in cash or before issuing any cheque or warrant in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause ( c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2, deduct from the amount of such dividend, income-tax at the rates in force.' 8. Deduction has to be made in two different situations namely :-( a) before making any payment in cash or before issuing any cheque or warrant in respect of dividend or (b) before making any distribution or payment to a shareholder, who is a resident of India, of any dividend within the meaning of clause (a) or sub-clause (b) or sub-clause ( c) or....
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.... 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 shareholders. The deeming provision as it applies in the case of loans or advances by a company to a concern in which its shareholders has substantial interest is based on the presumptions that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advances. 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. 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 concern can draw the same from the concern instead of the company directly. It is....
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....ver both as dividends normal divided as well as deemed dividend. Otherwise also, deemed dividend will be taxed in the hands of the shareholders and not in the hands of non-shareholders payee. Therefore, section 194 does not require TDS when payment is made to non-shareholders. Also, under section 206 of the Companies Act, 1956 the dividend can be paid a registered shareholder only. Therefore, section 194 of the Act is synchronized with the requirements of Companies Act, 1956 containing sections 150 and 206 of the Companies Act. Accordingly, in our opinion, the impugned amount cannot be as deemed income in the hands of recipient being so the provisions of section 194 is not applicable. Consequently, the provisions of sections 201 and 201(1A) cannot be applied. 11. The assessee also raised a note that the payments are made towards supplies in ordinary course of business. Under section 2(22)(e), only the payments made by a company by way of advance or loan to a shareholder alone is to be considered for the purpose of deemed dividend. Payment made by a company through a running account in discharge of its existing debts or against purchase or for availing services, such payments mad....