TaxTMI 
TaxTMI 
TaxTMI 
2014 (4) TMI 788
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....bsp; 2. Whether on the facts and circumstances of the case, the CIT(A) erred in law in interpreting section 2(22)(e) of the IT Act which was introduced to forestall the manipulation of likelihood of closely held companies not distributing their profits by way of dividends but by way of loans and advances to escape tax? 3. In view of the ground No.2 above, whether the CIT(A) is correct in holding that deemed dividend that arose under section 2(22)(e) of the IT Act should be taxed in the hands of the shareholder only and not in the hands of the concern as per Board/s Circular ' No.495 dated 22.09.87?" 2. The appeals before the Tribunal were directed against the order dated 10-6-2011 passed by the Commissioner of Income Tax (Appeals), Mysore in ITA Nos.4-42/443/668/CIT (A.-VI)/Bangalore, (for short "the first Appellate Authority") by which the appeals filed by the respondent-assessee were allowed with a direction to the Assessing Officer to examine the liability of the shareholders in respect of deemed dividend as per law. The Assessing Officer vide order dated 31-12-2009, held that the amount of Rs.9,56,48,027/- is the deemed income of....
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....,56,48,107/- as deemed dividend under Section 2(22)(e) of the Act and that the advance/loan paid to the respondent-assessee, who was and is not a shareholder of M/s.Ittina Properties (P) Limited, is covered by the word "dividend" as contained in Section 2(22)(e) of the Act? It is made clear that the question was formulated by us even before commencement of the arguments and then the learned counsel for the parties, by consent, were heard for final disposal at the stage of admission. 6. The questions that arise in these appeals for our consideration are against the fact that Rs.9,56,48,027/-, Rs.9,34,849/- and Rs.8,385/- for the assessment years 2006-07 to 2007-08 respectively were advanced by M/s. Ittina to the respondent-assessee, as contended by the revenue and therefore, liable to be taxed being deemed dividend under Section 2(22)(e) of the Act. The respondent-assessee has disputed payment/advancement of these amounts as dividend and according to them, these amounts were paid as advance by M/s. Ittina to the respondent-assessee as routine business transactions. What we propose to examine is whether these amounts, paid by M/s.Ittina, as loan/advance to the respondent-assessee, c....
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....he facts and in the circumstances of the case, the Income-tax Appellate Tribunal, in law, was right in deleting the addition of Rs.35 lakhs treated as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961, by stating that since the transactions are not reflected in the books of account, it cannot be treated as deemed dividend? 2. Whether, on the facts and in the circumstances of the case, the Tribunal in law, was right in holding that the Assessing Officer has not established that the money was advanced for the benefit of any shareholder and the same has to be taxed in the hands of such shareholder who obtained the benefit and not in the hands of the assessee-company, following the ratio of the decision in the case of Asstt. CIT v. Bhaumik Colour P. Limited [2009] 313 ITR (AT) 146 (Mumbai); 27 SOT 270. (SB)?" 10.1 While dealing with this question the Bombay High Court after considering the scheme of Section 2(22)(e) of the Act observed thus: "However, even on the second aspect which has weighed with the Tribunal, we are of the view that the construction which has been p....
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....ns made by the Division Bench of the Delhi High Court in Ankitech (P.) Ltd. (supra) which read thus: "The intention behind enacting the 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 interest, is b....
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....nclined to agree with the observations of the Mumbai Bench decision in Bhaumik Colour (P.) Ltd. [2009] 313 ITR (AT) 146 (Mumbai) [SB] 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." 11.2 Our attention was also invited to another judgment of the Supreme Court in Keshavji Ravji & Co. v. CIT [1990] 183 ITR 1/49 Taxman 87. The relevant observations in the said judgment read thus: "The Tribunal, much less the High Court, is an authority under the Act. The circulars do not bind them. But the benefits of such circulars to assessees have been held to be permissible even though the circulars might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law. But that is not the same thing as saying that such circulars would either have a binding effect in the interpretation of the provision itself or that the Tribunal and the High Court are supposed to i....
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.... by amendment in the aforesaid provision carried out by the Finance Act, 1987 w.e.f. 1st April, 1988. (2) Whether the assessee who is a partnership firm can be treated as Shareholder' because of the reason that it has purchased the shares in the name of the two partners.' 13. It would be relevant to look into the provisions contained in Section 2(22)(e) of the Act, which reads thus: '"Dividend" includes ....... "(e) 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 th....
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....e presumption that the loans or advances would ultimately be made available to the shareholders of the Company giving the loan or advances. Loan or advance given to the shareholders or to a concern, under normal circumstances would not qualify as dividend, but it is so made by legal fiction created under Section 2(22)(e) of the Act. Thus, the definition of dividend has been enlarged, and that loan or advances given under the conditions specified under this provision would also be treated as dividend. The fiction, however, is not to be extended for enlarging the concept of shareholders. Dividend is to be given by any company, to its shareholders. Thus, in the second category under Section 2(22)(e) of the Act, loan or advances given to a concern, like the assessee in the present case, which is admittedly not a shareholder of the payee company, under no circumstances, could be treated as shareholder receiving dividend. As observed by Delhi High Court, if the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of deeming shareholder, then the legislature would have inserted deeming provision in respect of shareholder as well. The legislature has....