TaxTMI 
TaxTMI 
2017 (5) TMI 1365
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....-08 on 31/07/2007 admitting total income of Rs. 2,69,91,657/- besides agricultural income of Rs. 3,00,000/- and summery assessment u/s 143(1) was completed on 05/08/2008. After recording the reasons the case was reopened by issuing notice u/s 148 of the Act on 30/03/2013. Subsequently, notices u/s 143(2) and 142(1) dated 24/05/2013 were issued along with show cause to assess deemed dividend u/s 2(22)(e) in the hands of the assessee. The AR of the assessee filed reply dated 21/06/2014 on 24/06/2013. 3.1 The assessee Smt.G. Indira Krishna Reddy is having share holder in the company M/s Caspian Capital and Finance Pvt. Ltd., more than 10% and also share holder in the companies M/s. Metro Architectures & Contractors Pvt. Ltd and M/s Orbit Travels & Tours Pvt. Ltd having share holding of 20% and 40% respectively. As on 31.03.06, M/s. Metro Architectures & Contractors Pvt. Ltd., has authorized capital of Rs. 20,00,000/- issued capital of Rs. 1,00,000/- and share application money pending for allotment Rs. 7,17,80,000/-. Similarly, M/s. Orbit Travels & Tours Pvt. Ltd., also as on 31.03.2006 has authorized capital of Rs. 10,00,000/- issued capital of Rs. 6,00,000/-. In spite of such hug....
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...., more than 10% and also share holder in the companies M/s. Metro Architectures & Contractors Pvt Ltd and M/s Orbit Travels & Tours Pvt Ltd having share holding of 20% and 40% respectively. As on 31.03.06, Metro Architectures & Contractors Pvt Ltd., has authorised capital of Rs. 20,00,000/- issued capital of Rs. 1,00,000/- and share application money pending for allotment Rs. 7,17,80,000/-. Similarly, M/s. Orbit Travels & Tours Pvt Ltd., also as on 31.03.2006 has authorised capital of Rs. 10,00,000/- issued capital of Rs. 6,00,000/-. In spite of such huge amount of share application money pending for allotment and very less scope for issued capital in the case of second mentioned company, again M/s Caspian Capital and Finance Pvt. Ltd., (formerly known as GVK Capital & Finance Ltd.,) advanced an amount of Rs. 36.10 lakhs and 15.00 lakhs during the year in the guise of share application money to M/s. Metro Architecture & Contractors Pvt Ltd and Orbit Travels & Tours Pvt Ltd., respectively. Th payer company is also having accumulated profits an amount of Rs. 4,01,18,158/- 10.5. The fact that the authorized capital of the above mentioned company substantially low when compared to t....
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....ch an apportionment is subject to that if it was taxed in both the hands i.e. assessee and her husband, the apportionment is to be done. In case there was no such taxation in both the hands, the question of apportionment of the same does not obviously arise. 6. Aggrieved by the order of the CIT(A), the assessee is in appeal before us raising the following grounds of appeal, which are common in all the appeals, except the difference in quantum of additions: 1. The Order of the Commissioner of Income-tax (Appeals)-III, Hyderabad dated 30-072014 is erroneous, contrary to law and facts of the case. 2. a) The Commissioner of Income Tax (Appeals) erred in confirming addition of Rs. 25,55,000/- out of Rs. 51,1 0,000/- made u/s.2(22)(e) by the Assessing Officer stating that the Assessing Officer is justified in considering share application money made by the Caspian Capital and Finance Pvt Ltd with companies (i) Metro Architects & Contractors Pvt Ltd and (ii) Orbit Travel & Tours Pvt Ltd as deemed dividend u/s.2(22)(e). b) The Commissioner of Income Tax (Appeals) ought to have seen that the appellant did not receive any payment from Caspian Capital and Finance Pvt Ltd and therefor....
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....es not provide in whose hands it should be regarded as dividend. Therefore, whether such loans and advances should be regarded as dividend in hands of the concern receiving the loans and advances or in the hands of such shareholder needs to be analyzed. In this regard, he referred to Circular No. 495 of 1987 dated 22 September 1987 issued by CBDT, wherein the CBDT has clarified that the dividend under second limb to provisions of section 2(22)( e) of the Act is to be taxed in hands of the concern receiving the loans and advances. Relevant extract of the Circular is produced below: "10.3 The new provision would, therefore, be applicable in a case where a shareholder has 10 per cent or more of the equity capital. Further, deemed dividend would he taxed in the hands of a concern where all the following conditions are satisfied: (i) where the company makes the payment by way of loans or advances to a concern ; (ii) where a member or a partner of the concern holds 10 per cent of the voting power in the company; and (iii) where the member or partner of the concern is also beneficially entitled to 20 per cent of the income of such concern. With a view to avoid the hardship in cases whe....
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....gistered shareholder in a Company. 17. It is also found as a fact, from the audited annual return of the Company filed with ROC that the money towards shareholding in the Company was given by the assessee/HUF. Though, the share certificates were issued in the name of the Karta, Shri Gopal Kumar Sanei, but in the annual returns, it is the HUF which was shown as registered and beneficial shareholder. In any case, it cannot be doubted that it is the beneficial shareholder. Even if we presume that it is not a registered shareholder. as per the provisions of Section 2(22)(e) ofthe Act. once the payment is received by the HUF and shareholder (Mr. Sanei. karta. in this case) is a member of the said HUF and he has substantial interest in the HUF. the payment made to the HUF shall constitute deemed dividend within the meaning of clause (e) of Section 2(22) of the Act. This is the effect of Explanation 3 to the said Section. as noticed above. Therefore. it is no gainsaying that since HUF itself is not the registered shareholder. the provisions of deemed dividend are not attracted. For this reason, judgment in CP. Sarathy Mudaliar, relied upon by the learned counsel for the appellant, will....
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....ld be constant/same for any scenarios and cannot be altered to suit the intent of the revenue. He submitted that the amount of deemed dividend assessable in the hands of the Appellant should not be dependent on the shareholding of the other shareholders. The Ld. CIT (Appeals) held that where amount has been taxed either in the hands of the Appellant or spouse of the Appellant, the entire amount to be taxed in hands of the Appellant or Mr. Reddy, as the case may be. In this regard, the ld. AR relied on decision of Hon'ble Delhi Tribunal in the case of Puneet Bhagat -vs.- ITO [2016/157 lTD 353 (Delhi - Trib.) wherein it was held that deemed dividend would be assessable in the hands of shareholders to proportionate shareholding of the shareholders in the recipient entity. 10. Ld. DR, on the other hand, submitted that the Circular No. 495, on which reliance placed by the assessee, was issued in 1987 and subsequent to the said circular, there are lot of decisions rendered by various courts interpreting the statute and held that deemed dividend should be taxed in the hands of shareholder and not in the hands of recipient/concern. The decision of Gopal and Sons (HUF) (supra) relied....
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....erwise) made after 31.05.19987 by way of advance or loan. First limb a) to a shareholder, being a person who is the beneficial 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 percent of the voting power, Second limb b) or to my 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) Third limb c) or any payment by any such company on behalf, or for the individual benefit, or any such shareholder, to the extent to which the company in either case possesses accumulated profits. 23. It is rightly pointed out by the Bombay High Court in Universal Medicare (P) Ltd.(supra)that Section 2(22)(e) of the Act is not artistically worded. Be as it may, we may reiterate that as per this provision, the following conditions are to be satisfied: (1) The payer company must be a closely held company. (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. ....
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.... way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non-members. The second category specified under Section 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. 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, that has not happened. Most of the arguments of the learned counsels for the Revenue would stand answered, once we look into the matter from this perspective. 26. In a case like this, the recipient would be a shareholder by way of deeming provision. It is not correct on the part of the Revenue to argue that if this position is taken, then the income "is not taxed at the hands of the recipient". Such an argument based on the scheme of the Act as projected by the learned co....
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....tical issue of advancement of loan to one company, which is not a shareholder of the lender company following the. decision ofM/s. ACE Tyres Limited, Bachupally, Ranga Reddy Districl ITAT Mumbai Special Bench in case of Bhaumik Colour P. Ltd. (supra) and other decisions held as under: "5. It can be seen from the circular that the provisions of amended section 2(22)(e) are to be applied only to the payments made to the shareholders and not to any other person or concern other than the shareholders. The Allahabad High Court in the case of CIT vs. H. K. Mittal reported in 219 ITR 420 held that the chief ingredient of dividend as defined in sub clause (e) of clause (22) of section 2 of the I T Act is that the recipient should a shareholder on the day the loan was advanced. If that fact is not established, there cannot be a deemed dividend. Therefore, the provisions of sec. 2(22)(e) cannot be applied to MARC as it is not a shareholder in MTAR Technologies Pvt. Ltd. (Hereinafter called as MTAR). In this regard, the assessee relies on the decision of the ITAT Mumbai Bench "G" in the case of Seamist Properties Pvt. Ltd. vs. ITO reported in (2005) 1 SOT page 142. The assessee further sub....
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....sion. This expression only refers to the shareholder referred to in the earlier part of s. 2(22)(e) viz., a registered and a beneficial holder of shares holding 10 per cent voting power. The Hon'ble Rajasthan High Court in the case of Union of India vs. Wazir Singh AIR 1980 Raj 252, while dealing with an expression "no such application" in the context of r. 97 of the Rajasthan High Court Rules, 1952 has held as follows : "Generally the word 'such' refers only to previously indicated, characterized or specified. 'Such' is an adjective meaning, the one previously indicated or refers only to something which has been said before." The Hon'ble Allahabad High Court in the case of Mohan Lal & Anr. vs. Grain Chambers Ltd. AIR 1959 All 279 has held as follows : "In fact, it appears to us that the word 'such' is used before a noun in a latter part of a sentence, the proper construction in the English language is to hold that the same noun is being used after the word 'such' with all its characteristics which might have been indicated earlier in the same sentence." (d) If the above conditions are satisfied then the payment by the company to the concern (c) The very same person ....
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....st requirement of holding of shares both as a legal registered owner and beneficial owner of such shares is not satisfied in the case of the assessee. Therefore, provisions of s. 2(22)(e) would not be applicable at all to the case of the assessee. 28. The answer to the second question referred to the Special Bench is that the expression 'shareholder' referred to in s. 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of s. 2(22)(e) will not apply. Similarly, if a person is a beneficial shareholder but not a registered shareholder then also the provisions of s. 2(22)(e) will not apply. 29. In view of the fact that the assessee was not holding beneficial interest in shares of BPCL and UPPL, there is no requirement of answering the first question that arises for consideration in the case of the assessee viz., as to whether deemed dividend under s. 2(22)(e) of the IT Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender ? However, in the case of the intervener viz., Asstt. CIT vs. Weaveland, ITA No. 5036/Del/2008 (supra) thi....
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....consideration : "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 CIT(A) deleting the addition of Rs. 10 lakhs as deemed dividend under s. 2(22)(e) of the IT Act ?" The Hon'ble Court held as follows : "The important aspect, being the requirement of s. 2(22)(e) is, that 'the payment may be made to any concern, in which such shareholder is a member, or the 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 the other sources under s. 56, and in the very nature of things the income has to be of the....
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....239 (SC), at pp. 243-244. 13. In order to find out the right person, one has to examine the charging provisions of the Act. Secs. 4 and 5 of the Act are the charging provisions......." Thereafter, the Tribunal has referred to the provisions of s. 5(1) of the Act and has concluded that income accrues to the person who is the recipient of the payment from the company. The Tribunal has thereafter referred to Circular No. 495, dt. 22nd Sept., 1987 of the CBDT wherein it has been opined that deemed dividend would be taxed in the hands of a concern (non-shareholder) also if the conditions mentioned in the section are satisfied. 34. We are of the view that the provisions of s. 2(22)(e) do not spell out as to whether the income has to be taxed in the hands of the shareholder or the concern (non-shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of s. 2(22)(e) of the Act. 35. The intention behind enacting provisions of s. 2(22)(e) are 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 accumula....
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....meaning of the term "dividend" according to its ordinary and natural meaning to include even a loan or advance. Any loan or advance cannot be dividend according to its ordinary and natural meaning. The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word "dividend" is extended to loans and advances to a shareholder or to a concern in which a shareholder is substantially interested deeming 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 non-shareholder, the ordinary and natural meaning of the word "dividend" is taken away. In the light of the intention behind the provisions of s. 2(22)(e) and in the absence of indication in s. 2(22)(e) to extend 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 non-shareholder. 38. ....
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.... shareholder as follows : "Dividend does not include : (i) to (ii).......... (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-cl. (e) to the extent to which it is so set off." In the event of the payment of loan or advance by a company to a concern being treated as dividend and taxed 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 (I) (P) Ltd. (supra) is not correct. We therefore hold that deemed dividend under s. 2(22)(e) of the IT 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 ....
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.... action of the AO in not considering the CBDT Circular No. 495 of 1987, dated 22nd September 1987 which was binding on the AO, as raised in additional ground No. 4, we are of the view that the assessee is a share holder in the payer company i.e. M/s Caspian capital and Finance Pvt. Ltd. and also a shareholder in the companies M/s Metro Architectures & Contractors Pvt. Ltd., and M/s Orbit Travels & Tours Pvt. Ltd., to whom the payer company advanced an amount of Rs. 36.10 lakhs and Rs. 15.00 lakhs respectively. The CBDT issued the circular in 1987 and subsequently, there are number of decisions rendered by various courts interpreting the statute and held that deemed dividend should be taxed in the hands of the shareholder and not in the hands of recipient concern. The Circular No. 495 is not binding on the courts and lower courts have to follow the judgements of higher judiciary as matter of judicial discipline. However, Ld. AR argued that the said Circular is a beneficial circular, but, as observed from the Circular, it is not a beneficial or benevolent circular, but, it is only a clarificatory in nature. Since the issue has been settled by Hon'ble special bench and approved by Hon....
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....bove paragraphs. The entire advances or loans given to the concerns of the share holders having substantial interest required to be to the extent of accumulated profits. Therefore, there is no failure of computation mechanism in taxing the deemed dividend as the entire advances are to be taxed. The Hon'ble Supreme Court in the case B.C. Srinivasa Shetty, [1981] 5 Taxman 1 (SC) on the issue of failure of computation mechanism, observed on taxing of goodwill under capital assets for which no cost of acquisition was available. For computing capital gains as per section 45, the cost of acquisition along with indexation required to be reduced and in the absence of cost of the asset mode of computation was not explained and hence the computation mechanism fails. Therefore, the case law relied up on by the assessee is not applicable to the case of the assessee. The dividend is always distributed to the shareholders of the company and the entire advances or loans given to such concerns of shareholders with substantial interest should be brought to tax to prevent unauthorized distribution of dividend to the controlling shareholders in the guise of loans and advances.. In the asssessee's cas....
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....f section 2(22). The substantial interest in a company has not been defined under section 2(22)(e); however, this term has been defined in section 2(32) and in the Explanation to section 40A(2) whereby a person shall be deemed to have substantial interest in a business or a profession if the business and profession is carried on by a company, and such person is, at any time during the previous year, is the beneficial owner of shares carrying not less than 20 per cent of the voting powers. In the case in hand, the assessee is having 45 per cent of shareholding of the borrowing company. Therefore, by applying the parameters as per section 2(32) and Explanation to section 40A(2) as well as any other parameters in general, the assessee is having substantial interest in the borrowing company, i.e., Oryx. [Para 7-8] Since the assessee is a shareholder of the lending company and also having a substantial interest in the borrowing company, the conditions as prescribed under section 2(22)(e) are satisfied to include the payment in question within the ambit of 'dividend' to be taxed in the hands of the assessee. The contention of assessee that only a proportionate amount of loan r....