TaxTMI 
TaxTMI 
2014 (3) TMI 20
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....er Pvt. Ltd., the Provisions cannot be invoked. 4. The learned CIT(A) ought to have upheld the action of the Assessing Officer as Sri G.R.Reddy has substantial Interest in both the companies and as such the amounts received by the assessee partakes the character of deemed dividend. 5. ........." 3. Facts of the case in brief are that the assessee is engaged in the business of manufacturing of tubes and tyres. It supplies tubes and tyres exclusively to CEAT and Apollo Companies. For the assessment year, the assessee received inter-corporate deposits (ICDs) of Rs.1,95,00,00 from its sister concern, M/as. Excel Rubber Pvt. Ltd. Such ICD amount of Rs.1,95,00,000 was brought to tax as deemed dividend under S.2(22)(e) of the Income-tax Act, 1961 by the Assessing Officer. Assessee submitted before the Assessing Officer that the assessee is not a shareholder in M/s. Excel Rubber Pvt. Ltd. and the amount received is not in the nature of loan, but it is in the nature of ICD. The Assessing Officer was not convinced with the explanation of the assessee, and made the impugned addition, on the ground that the Addl. CIT Range-1, Hyderabad had issued directions under S.144A of the Act for....
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....ance of the direction of the Addl. Commissioner of IT under S.144A of the Act, has been deleted by the CIT(A), and an appeal of the Revenue against that order of the CIT(A) was pending before the Tribunal. It has now been brought to our notice that the Tribunal vide its order dated 30.9.2013 in ITA No.1721/Hyd/2012 upheld the said order of the CIT(A) and consequently dismissed the appeal of the Revenue. The reasons discussed by the Tribunal for upholding the view taken by the CIT(A) for that year in its order dated 30.9.2013l, vide paras 10 and 11 thereof read as follows- "8. We have heard submissions of the parties and perused the materials on record as well as the orders passed by the revenue authorities. We have also carefully examined various judicial precedents placed before us. So far as ICDs of Rs. 2,91,50,000/- is concerned we fully agree with the conclusion of the CIT(A) that it cannot be considered to be in the nature of loans and advances so as to treat it as deemed dividend u/s 2(22)(e) of the Act. Even assuming that the ICDs are loans and advances, still it cannot be treated as deemed dividend u/s 2(22)(e) of the Act because of the following reasons. It is an undisp....
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..... (2) It applies to any sum paid by way of loan or advance during the year to the following persons: (a) A shareholder holding at least 10 of voting power in the payer company. (b) A company in which such shareholder has at least 20% of the voting power. (c) A concern (other than company) in which such shareholder has at least 20% interest. (3) The payer company has accumulated 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....
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....ed at the hands of the recipient". Such an argument based on the scheme of the Act as projected by the learned counsels for the Revenue on the basis of Sections 4, 5, 8, 14 and 56 of the Act would be of no avail. Simple answer to this argument is that such loan or advance, in the first place, is not an income. Such a loan or advance has to be returned by the recipient to the company, which 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. Insofar 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 ....
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.... page 142. The assessee further submits that the provisions of sec. 2(22)( e) mention as under: "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 individual benefit, of any such shareholder, to the- extent to which the company in either case possesses accumulated profits" 6. The intention of the legislature is clarified in circular issued by the CBIT as at the time of amendment of clause (e) of sub section (22) of sec. 2 is further fortified by the fact that for deduction of tax at source. Sec. 194 provide that such deduc....