TaxTMI 
TaxTMI 
2012 (11) TMI 749
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....t, by observing that as Miss Pooja Jain had 31.11% of M/s. Dugar Growth Fund P. Ltd. and had 25% shareholders in M/s. Elite Farms P. Ltd., the sum advanced by M/s. Dugar Growth Funds P Ltd. to the assessee attracts the provisions of Section 2(22)(e) of the IT Act, 1961. The assessee submitted before the AO that transaction was carried out during the normal course of the business vide order sheet entry dated 16.11.2009, the assessee was asked to explain as to how transaction with M/s. Dugar Growth Funds P. Ltd. are routine and during the course of normal business, it was asked to file copy of agreement with the party, details of investments are made for M/s. Dugar Growth funds P. Ltd. and whether such investment has been done with any other purpose. 3. The AO after considering the replies filed by the assessee did not find any merit in them for the reasons given in the asstt. order, thereby making addition of Rs. 72,67,610/- against funds of Rs. 2,08,50,00/- transferred by Dugar Growth Funds P. Ltd. 4. Assessee took up the matter in appeal against such addition and Ld. CIT(A) while considering and accepting the plea of the assessee has concluded to delete the impugned addition....
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....e appeal of the revenue. 6. Ld. DR could not controvert this factual aspect but submitted that since the provision of section 2(22)(e) are attracted in the case of the shareholder Miss Pooja Jain therefore necessary direction should be passed for invoking the provisions of section 2(22)(e) in the case of the said shareholder. 7. We have heard both the sides and considered the material on record and find that the issue raised in this appeal is squarely covered in favour of the assessee by Delhi High Court's decision in the case of CIT vs. Ankitech Pvt. Ltd. and others in ITA No. 462 of 2009 with ITA Nos. 2087 of 2010 and others vide order dated 11th May, 2011, while discussing and considering various limbs of 2(22)(e) of the Income Tax Act by discussing in detail special bench Mumbai decision in the case of ACIT Vs. Bhaumik Colour (P) Ltd.118 ITD 1 (Mum.), Bombay High Court decision, which affirmed such special bench decision in the case of CIT Vs. Universal Medicare (P) Ltd., while considering CIT Vs. Hotel Hilltop 217 CTR (Raj.)527, Kantilal Manilal and Ors. V. The CIT 41 ITR 275 (SC), Andaleeb Sehgal vs. Union of India (UOI) and Anr. 173 (2010) DLT 296, Builders Asso....
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.... profits on the date of any such payment and the payment is out of accumulated profits. (4) The payment of loan or advance is not in course of ordinary business activities. 24. The intention behind enacting provisions of Section 2(22)(e) is that closely held companies (i.e companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead 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) of the Act is to tax dividend in the hands of shareholders. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial i....
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....has given the loan or advance. 27. Precisely, for this very reason, the Courts have held that if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend under Section 2(22)(e) of the Act. 28. In so far as reliance upon Circular No. 495 dated 22.09.1997 issued by Central Board of Direct Taxes is concerned, we are inclined to agree with the observations of the Mumbai Bench decision in Bhaumik Colour (P) Ltd. (supra) that such observations are not binding on the Courts. Once it is found that such loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not a shareholder, and that according to us is the correct legal position, such a circular would be of no avail. 29. No doubt, the legal fiction/deemed provision created by the Legislature has to be taken to 'logical conclusion' as held in Andaleeb Sehgal (supra). The Revenue wants the deeming provision to be extended which is illogical and attempt is to create a real legal fiction, which is not created by the Legislature. We say at the cost of repetition that the definition of shareholder is not enlarged by any fiction. ....