TaxTMI 
TaxTMI 
2012 (8) TMI 1052
X X X X Extracts X X X X
X X X X Extracts X X X X
....quarely covered u/s 2(22)(e) of the IT Act. 3. The ld. CIT(A) has erred in law and on facts in deleting the above addition of deemed dividend made for the payments by way of advance or loan by M/s New Era Exports (P) Ltd. and M/s Gee Key Real Estate (P) Ltd. for the individual benefit of the Assessee Co., ignoring the facts that Shri Ajay Agarwal and Shri Girraj Kishor Agarwal respectively were the beneficial share holders in both the above companies and also having substantial interest in the assessee concern M/s Indian Casting Co. and thus the case was squarely covered under the second limb of provision of section 2(22)(e) of the IT Act. 4. The ld. CIT(A) has erred in law and on facts in deleting the above addition placing reliance on some judicial decisions & following the decision of Jurisdictional Hon'ble ITAT in the case of M/s Nirmala Realtors (P) Ltd. in ITA No.69, 70 & 71/Agra/2011 wherein Hon'ble ITAT has observed that the provisions relating to section 2(22)(e) are ambiguous and has held that intention of the legislature is to tax dividend only in the hands of the share holders (Regd. Share holder) of the lender Co. and not in the hands of concern in which share hold....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an be invoked only in the case of a registered shareholder. Vide para no.31 & 32 of the judgement (cited supra), the Hon'ble ITAT observed as under :- "31. Another important issue that arises for consideration is, whether this payment can be assessed in the hands of the assessee as deemed dividend being the payment to a concern where shareholder holds substantial interest, in whose hands the income would be brought to tax whether in the hands of the "concern" or the "shareholder"? The assessing Officer added it in the hands of the concern i.e. the assessee and CIT(A) has also confirmed the same. Even though CBDT Circular No.495 dated September 22, 1987, 168 ITR (St.) 87 states that the deemed dividend would be taxed in the hands of a concern (non-shareholder) if the conditions mentioned in the section are satisfied. However, our view is different in view of the decisions taken by the various courts. 32. The similar issue came up for consideration before Mumbai ITAT (Special Bench) in case of ACIT vs. Bhaumik Colour P. Ltd. 313 ITR 146 (AT). The Special Bench held that the provisions of section 2(22)(e) do not spell out as to whether the income has to be taxed in the hands of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....companies as deemed dividend in the hands of the assessee. The action of the A.O. is arbitrary, illegal and highly unjustified. Ld. Authorised Representative submitted that section 2(22)(e) of the Act is applicable in respect of payment which was made only to share holder and not in any other case. Ld. Authorised Representative relied upon the following decisions:- S.No. Citation Name of parties 1 83 ITR 170 (SC) CIT vs. C.P. Sarathy Mudaliar 2 122 ITR 1 (SC) Rameshwar Ds Sanwar Mal vs. CIT 3 259 ITR 9 (All) Raj Kumar Singh & Co vs. DCIT 4 313 ITR 116 (Raj) CIT vs Hotel Hilltop 5 199 Taxmann 341 (Del) CIT vs Ankitech (P) Ltd. 6 218 ITR 239 (SC) ITO vs. Atchaiah 7 41 ITR 275 (SC) Kantilal Manilal vs CIT 8 74 ITR 849 (SC) CIT vs Nalin Behari Lal 9 59 ITR 574 (SC) CIT vs Moon Mills Ltd. 10 277 ITR 128 (Cal) Mukundray K. Shah vs. CIT 11 313 ITR (AT) 146 (Mum) (SB) ACIT vs Bhaumik Colour Pvt. Ltd. 12 324 ITR 263 (Bom) CIT vs. Universal Medicare Pvt. Ltd. 13 204 Taxmann 82 (P&H) CIT vs. Sharman Woolen Mills Ltd. 14 204 Taxmann 56 (Del) (Mag) CIT vs. MCC Marketing Pvt. Ltd 15 206 Taxmann 32 (Del) (Mag) CIT vs. St....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y concern, in which such shareholder is a member or partner and in which he has substantial interest or any payment by any such company on behalf or for the individual benefit of any such shareholder . . . " Thus, the substance of the requirement is that the payment should be made on behalf of or for the individual benefit of any such shareholder, obviously, the provision is intended to attract the liability of tax on the person, on whose behalf or for whose individual benefit the amount is paid by the company whether to the shareholder or to the concerned firm. In which event, it would fall within the expression "deemed dividend". Obviously, income from dividend is taxable as income from other source under section 56 of the Act and in the very nature of things the income has to be of the person earning the income. The assessee partnership in the present case is not shown to be one of the persons being shareholder. Of course, the two individuals being Shri Ajay Kumar Agarwal, and Shri G.K. Agarwal persons holding more than requisite amount of shareholding and having requisite interest in the firm but then thereby the deemed dividend would not be deemed dividend in the hands of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the case of Exide Industries Ltd. v. Union of India [2007] 292 ITR 4701, in which the provisions of section 43B(f) have been struck down. The Tribunal directed the Assessing Officer to allow the amount as claimed towards leave encashment. The issue as regards the correctness of the judgment of the Calcutta High Court in Exide Industries Ltd.'s case (supra) is pending in appeal before the Supreme Court and interim orders have been passed. The appeal, insofar as the issue of leave encashment is concerned is admitted on the following question of law : "Whether the Tribunal was justified in directing the Assessing Officer to allow the amount claimed by way of provision for leave encashment in view of the provisions of section 43B(f) of the Income-tax Act, 1961 ?" 3. The first and second questions are now taken up. Briefly stated, the admitted facts are that an amount of ₹ 32,00,000 was transferred from the bank account of a company by the name of Capsulation Services Private Limited (CSPL) to the account of the assessee maintained in the Chembur Branch of the State Bank of India. Mr. Vikram Tannan was a Director of CSPL. He held over 10 per cent of the equity capital of C....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Vikram Tannan who was a Director of the assessee held more than 20 per cent of the equity capital of CSPL. The Assessing Officer came to the conclusion that all the conditions for the application of section 2(22)(e) were fulfilled and the loan of ₹ 35,00,000 from CSPL would have to be treated as deemed dividend in the hands of the assessee. 5. In appeal, the Commissioner of Income-tax (Appeals) affirmed the order of the Assessing Officer, save and except with a modification that the actual amount which has been received by the assessee was held to be ₹ 32,00,000 and not ₹ 35,00,000 as determined by the Assessing Officer. 6. The Tribunal in appeal has reversed the findings of the Commissioner of Income-tax (Appeals) on two counts. Firstly, the Tribunal held that the provisions of section 2(22)(e) would be attracted if a loan was taken by the shareholder from any closely held company. In the present case, the Tribunal noted that the amount was part of a fraud committed on the assessee and the transaction was not reflected in its books of account. In the circumstances, section 2(22)(e) was held not to apply. Secondly, the Tribunal held that even otherwise, the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....view any payment made by a company on behalf of or for the individual benefit, of any such shareholder; (iv) Clause (e) will apply to the extent to which the company, in either case, possesses accumulated profits. The remaining part of the provision is not material for the purposes of this appeal. By providing an inclusive definition of the expression 'dividend', section 2(22) brings within its purview items which may not ordinarily constitute the payment of dividend. Parliament has expanded the ambit of the expression 'dividend' by providing an inclusive definition. 9. In order that the first part of clause (e) of section 2(22) is attracted, the payment by a company has to be by way of an advance or loan. The advance or loan has to be made, as the case may be, either to a shareholder, being a beneficial owner holding not less than ten per cent of the voting power or to any concern to which such a shareholder is a member or a partner and in which he has a substantial interest. The Tribunal in the present case has found that as a matter of fact no loan or advance was granted to the assessee, since the amount in question had actually been defalcated and was not reflected in the boo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ection 2(22)(e) and no other basis has been suggested in the order of the Assessing Officer. 10. For the aforesaid reasons, the first and second questions will not give rise to any substantial questions of law." 7. Further, On identical set of facts, the Hon'ble Rajasthan High Court in the case of CIT vs. Hotel Hilltop, 313 ITR 116 (Raj) has held as under :- (Page nos.117 to 120) "This appeal by the Revenue against the judgment of the Tribunal dated September 16, 2004, was admitted, vide order dated March 29, 2005, by framing the following substantial questions of law:- "1. Whether on the facts and in the circumstances of the case and in law, the learned Tribunal was justified in upholding the order of learned Commissioner of Income-tax (Appeals) deleting the addition of ₹ 10 lakhs as deemed dividend under section 2(22)(e) of the Income-tax Act ? 2. Whether the assessee-firm whose partners hold 100% share in M/s. Hilltop Palace Hotels (P.) Ltd., had received the payment of ₹ 10 lakhs by way of security and not as an advance is perverse?" The necessary facts are that a return was filed by the assessee (firm) M/s. Hotel Hilltop, 5, Ambavgarh, Udaipur, declaring....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e amount of ₹ 10 lakhs could not be assessed to tax under section 2(22)(e). It was also found that this amount cannot be stated to be an advance or loan as the agreement specifically mentions it as security. It was also considered that as on April 1, 1990, the company has accumulated profits of ₹ 44,825/- only. Thus, the ingredients of the deeming clause are not satisfied. It was reiterated that unless the firm is a registered shareholder of the company any amount of advance to the partner cannot be taxed in the hands of the firm as such. Thus, the appeal was dismissed. We have heard learned counsel on the questions framed. Long drawn arguments were made on either side. However, before proceeding further, we may gainfully quote the provisions of section 2(22)(e), which read as under :- "2(22)(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 share holder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whet....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... common persons holding more than requisite amount of shareholding and having requisite interest in the firm but then thereby the deemed dividend would not be deemed dividend in the hands of the firm rather it would obviously be deemed dividend in the hands of the individuals on whose behalf or on whose individual benefit being such shareholder the amount is paid by the company to the concern. Thus, the significant requirement of section 2(22)(e) is not shown to exist. The liability of tax as deemed dividend could be attracted in the hands of the individuals being the shareholders and not in the hands of the firm. Thus, the result of the aforesaid discussion is that question No. 2, as framed, is answered in favour of the Revenue, and against the assessee, while question No. 1 is answered against the Revenue and in favour of the assessee though for different reasons. The net result of the answer to the above questions is, that the appeal fails and is dismissed." 8. As regards the judgement of Hon'ble Delhi High Court in the case of CIT vs. National Travel Services, 202 Taxman 327 (Delhi) cited by the ld. Departmental Representative, we noticed that in another judgement in the....