TaxTMI 
TaxTMI 
2016 (1) TMI 1078
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.... case are that the assessee company which is engaged in the business of ship breaking filed its return of income for Asst. Year 2007-08 on 29.10.2007 declaring total income at Rs. 47,11,510/-. The case was selected for scrutiny assessment and notice u/s 143(2) was issued and served on the assessee. The Assessing Officer completed the assessment by making addition of Rs. 14,02,522/- on account of excess interest claimed to be paid to a party covered u/s 40A(2)(b) of the Act and addition of Rs. 85,21,606/- on account of deemed dividend income and accordingly assessed the income of the assessee at Rs. 1,46,35,638/-. 4. Aggrieved, assessee went in appeal before the ld. CIT(A) who sustained the addition made u/s 40A(2)(b) and deleted the addition made on account of deemed dividend. Assessee is in appeal before the Tribunal against the action of ld. CIT(A) in confirming the disallowance out of interest expenses @ 3% u/s 40A(2)(b) of the Act. 5. The ld. AR submitted that during the year regular loans and advances were received and paid to Mr. K. K. Bansal who is one of the directors of the company having substantial holding in the company and assessee has paid interest to Mr. K. K. Bans....
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....td. (2015 60 taxmann.com 483 (Gujarat) (copy of decision is placed on record). 8. The ld. DR relied on the orders of lower authorities. 9. We have heard the rival contentions and perused the material on record. The basic reason due to which Assessing Officer went ahead to make addition of Rs. 14,02,522/- on account of interest relating to the parties was that assessee paid interest @ 15% to its director and major share holder Mr. K. K. Bansal and charged interest @ 12% on the loans to its sister concern Mahavir Rolling Mills Pvt. Ltd. of which Mr. K. K. Bansal was a major share holder and Assessing Officer took a view that assessee company has intentionally moved the funds received from Mr. K. K. Bansal by paying 15% interest and put it to Mahavir Rolling Mills Pvt. Ltd. and charged 12% interest and thereby claimed excess interest by 3% and made addition of this excess 3% interest being made to a relative under the provisions of sec.40A(2)(b) of the Act and made addition of Rs. 14,02,522/-. 10. However, considering the submissions of ld. AR and examining the records as well as ledger a/c of Mr. K. K. Bansal and Mahavir Rolling Mills P. Ltd. in the books of account of assessee, w....
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....ansactions entered into by the assessee company with its director, K.K. Bansal and its sister concern Mahavir Rolling Mills were normal business transactions and did not reflect any intention of the assessee to will-fully evade tax by paying higher rate of interest and therefore, we delete the addition made by Assessing Officer and allow the ground of appeal of assessee. 12. Ground No.2 is of general nature, which requires no adjudication. 13. Now we take up cross appeal of Revenue in ITA ITA No.2191/Ahd/2011 for Asst. Year 2007-08 wherein following grounds have been taken up :- 1. The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 85,21,606/- on account of deemed dividend u/s. 2(22)(e) without appreciating the fact that the assessing officer had established that the payment made by Mahavir Rolling Mills Pvt. Ltd. by way of advances is covered under the provisions of section 2(22)(e). 2. On the facts and in the circumstances of the case, the ld. CIT(A) ought to have upheld the order of the Assessing Officer. 3. It is, therefore, prayed that the order of the ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above e....
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....(e) has been dealt by the Co-ordinate Bench in assessee's own case for Asst. Year 2005-06 wherein it has been decided in favour of assessee by observing as under :- "14. We have heard rival contentions and gone through the facts and circumstances of the case. We find from the assessment order that the Assessing Officer observed that M/s. MIPL is a company in which the public is not substantially interest and one of the Director, Shri K.K Bansal holds more than 20% of share both in the assesseecompany and M/s MRPL, the AO further observed that as per the books of account, M/s. MRPL has advanced huge sum to M/s MRPL i.e. the assessee-company and MIPL have shown reserves and surplus at Rs. 1,01,54,414/-. The AO therefore observed that the loans and advances made by MIPL to MRML is liable to taxed as deemed dividend. In response to the show cause notice asking the assessee to explain why the amount should not be treated as deemed dividend u/s.2(22)(e), the assessee filed written submissions dated 22-12-2007 which had been reproduced by the AO at para-7.3 in assessment order. It was explained to the AO in the course of assessment proceedings that the assessee-company is not holding a ....
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....er) also if the conditions mentioned in the section are satisfied. 34. We are of the view that the provisions of section 2(22)(e) do not spell out as to whether the income has to be taxed din the hands of the share-holder or the concern (non-shareholder). The provisions are ambiguous. IT is therefore necessary to examine the intention behind enacting the provisions of section 2(22)(e) of the Act. 35. 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 shareholder 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....
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.... 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 operate. If the definition of "dividend" is extended to a loan or advance to a nonshareholder 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) and in the absence of indication in section 2 (22)(e) to extended the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a non-shareholder cannot be taxed as deemed dividend in the hands of a nonshareholder. 38. The basic characteristic of dividend as held by the apex court in the case of Kantilal Manilal v. CIT [1961] 41 ITR 275 is a share of profits of the company given to its shareholders. Further, section 206 of the Companies Act, 1956, prohibits payment of dividend to any person other than the registered shareholder. If one were to break up the natural meaning the following components emerge (a) dividend is a share of profits of the company (b) paid to its shareholders. Section 2(22) of the Act artific....
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....xed in the hands of the concern then, the benefit of set off cannot be allowed to the concern, because the concern can never receive dividend from the company which is only paid to the shareholder, who has substantial interest in the concern. The above provisions also therefore contemplate deemed dividend being taxed in the hands of a shareholder only. For the reasons stated above, we are of the view that the law laid down in the case of Nikko Technologies Ltd. (supra) is not correct. We, therefore, hold that deemed dividend under section 2(22)(e) of the Income-tax Act, 1961, can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other person. 41. In the light of the above discussion, the questions referred to the Special Bench are answered as follows: On the first question: Deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. On the second question: The expression shareholder referred to in section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but n....