TaxTMI 
TaxTMI 
2019 (1) TMI 391
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.....s. 143(3) of the Income Tax Act, 1961 (in short 'the Act') giving effect to the directions of Dispute Resolution Panel-I, Mumbai (DRP) dated 23.12.2016. 3. Since assessee has raised multiple Grounds, we deem it fit and proper to reproduce the Grounds raised in the Memo of appeal, which read as under :- "Ground 1 - Re-opening is bad in law in the absence of any income/escapement of assessment and if at all can only be on protective basis 1.1 In the facts and circumstances of the case and in law, the Assessing Officer (AO) erred in reopening the assessment and passing assessment order under Section 147 / 148 read with Section 143(3) of the Income Tax Act, 1961 (Act) determining total income of the Appellant at Rs. 13,00,00,000 and the Dispute Resolution Panel (DRP) erred in confirming the same. 1.2 In the facts and circumstances of the case and in law, the AO erred in re-opening the assessment and the DRP erred confirming the same by treating the Inter Corporate Deposits (ICDs) of Rs. 13,00,00,000 given by Portescap India Private Limited (Portescap) with Videojet Technologies India Private Limited (Videojet) (both wholly owned Indian subsidiaries of the....
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.... alleged deemed dividend erroneously taxed at 42.23 percent on gross basis (this ground without prejudice to Ground 1 and 2) 3.1 On the facts and circumstances of the case and in law, the AO erred in concluding and the DRP erred in confirming the taxation of alleged deemed dividend at 42.23 percent on gross basis. 3.2 The AO and the DRP failed to appreciate that the Appellant is a tax resident of Mauritius thereby eligible to be governed by the provisions of the India-Mauritius Tax Treaty (Tax Treaty) under Section 90(2) of the Act and thus eligible for lower rate of 5 percent taxation of dividend income under Article 10 thereof including on deemed dividend under Section 2(22)(e) of the Act and the term paid therein cannot be narrowly construed to mean direct payment to shareholders and includes any payments for the benefit of or on behalf of its shareholders including under the Section 2(22)(e) of the Act as deemed dividend. 3.3 The Appellant prays that taxing deemed dividend at 42.23 percent on gross basis is erroneous, unwarranted and the AO be directed to restrict the taxation of the alleged deemed dividend to 5 percent under Article 10 of the Tax Tre....
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....noticing the common shareholding of the assessee in the aforesaid two concerns, examined the applicability of Sec. 2(22)(e) of the Act qua the amount of Rs. 13 crores advanced by Portescap to Videojet. As per the Assessing Officer, the amount of Rs. 13 crores advanced by Portescap to Videojet falls within the purview of Sec. 2(22)(e) of the Act and accordingly, the assessee-company being the common shareholder, the said amount was treated as 'deemed dividend' u/s 2(22)(e) of the Act in the hands of the assessee-company. The relevant discussion in the assessment order also reveals the defence sought to be put-up by the assessee. As per the assessee, the amount advanced by Portescap to Videojet was not in the nature of a loan or advance as understood for the purposes of Sec. 2(22)(e) of the Act inasmuch it was an Inter-Corporate Deposit (ICD) placed by Portescap with Videojet. The aforesaid plea was sought to be supported by pointing out that a loan or advance is quite distinct from an ICD and, therefore, the said amount would not fall within the purview of Sec. 2(22)(e) of the Act. Be that as it may, we may not dwell much on the merit of the controversy at the present since the prel....
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....in India and had to offered deemed dividend as prescribed in section 2(22)(e) of the Act, for taxation in India, the income had escaped assessment for AY 2009-10 in the case. In this case, explanation 2(a) of section 147 is applicable. In view of the above, I have reasons to believe that income chargeable to tax of the M/s. Kollmorgan India Investment Company, has escaped assessment for A.Y 2009-10 (FY 2008-09) in the meaning of section 147 of I-T Act, 1961. Further, the income chargeable to tax which has escaped assessment amounts to or likely to amount to One lakh rupees or more for the year. This case doesn't fall under the first proviso to section 147, as no assessment u/s 143(3) or u/s 147 has been made in this case for the A.Y 2009-10. The necessary approval of the Addl. DIT(IT)-rg. 3 has been obtained on 18.07.2014 on 18.07.2014 for reopening of the assessment of M/s. Kollmorgan India Investment Company for the AY 2009-10. Accordingly, issue notice u/s. 148 of the I-T Act, 1961. DDIT(IT)-3(1), Mumbai" 7. A perusal of the aforesaid reasons would show that as per the Assessing Officer, an information was received from DCIT-8(2), Mumbai vi....
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.... of CBDT as the same are binding on the departmental authorities, and, thus the belief of the Assessing Officer on escapement of income is untenable. 9. On the other hand, the ld. CIT-DR appearing for the Revenue justified the reasons recorded for initiation of proceedings under Sections 147/148 of the Act, as according to him, the assessee being the common shareholder in the two concerns, Portescap and Videojet, the amount advanced by Portescap to Videojet was of the nature covered by Sec. 2(22)(e) of the Act and, therefore, the impugned sum has been rightly sought to be assessed in the hands of the assessee-company. On this basis, the ld. CIT-DR has justified the applicability of Sec. 2(22)(e) of the Act in the hands of the assessee and has accordingly defended the reopening of assessment in order to bring to assessment such income. 10. We have carefully considered the rival stands. Sec. 147 of the Act prescribes that if the Assessing Officer has reasons to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to t....
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....rescribed in the section. Broadly speaking, any loan or advance made by a corporate entity to its shareholder or on behalf of a shareholder or for the individual benefit of a shareholder can be deemed to be a payment by way of dividend in terms of Sec. 2(22)(e) of the Act subject to fulfilment of other conditions. In the present case, at the time of recording the reasons contemplated in Sec. 147 of the Act, the Assessing Officer came to a belief that the amount of Rs. 13 crores given by Portescap to Videojet attracted the deeming provision of Sec. 2(22)(e) of the Act in the hands of the assessee who was a common shareholder in the two concerns. At this stage, we are not concerned with the correctness or otherwise of such stand of the Assessing Officer, but we are only trying to evaluate as to whether under the given circumstances, the assumption of jurisdiction under Sections 147/148 of the Act is competent in law. The precise point is as to whether on the date of recording of reasons, could it be said that the aforesaid income constituted an income chargeable to tax which had escaped assessment. 13. In this context, our attention has been invited to the assessment in the case o....
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....e, the Assessing Officer went ahead and assessed the amount of Rs. 13 crores as 'deemed dividend' within the meaning of Sec. 2(22)(e) of the Act in the hands of Videojet on a substantive basis. 14. In this background, now we have to consider the formation of belief about escapement of income qua the aforesaid amount in the hands of the assessee-company on the date of recording reasons, i.e. 18.07.2014. Quite clearly, on the date of recording reasons, assessment of Rs. 13 crores as 'deemed dividend' in terms of Sec. 2(22)(e) of the Act stood finalised on substantive basis in the hands of Videojet and, of course, on protective basis too, in the hands of Portescap. The reasons recorded also bring out that they were based on the information provided by the DCIT-8(2), Mumbai vide communication dated 03.07.2013, who was the assessing authority for Portescap. The moot question is when the same income purported to be taxable u/s 2(22)(e) of the Act is already lying taxed, can it be said that it constituted an escapement of income so as to be the basis for Assessing Officer in the instant case to initiate proceedings under Sections 147/148 of the Act. Ostensibly, the reasons for reassess....
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....untenable in the eyes of law and, consequently the assessment is liable to be quashed. We hold so. 15. Though in the earlier paras we have quashed the assessment, the rival parties have also made arguments on the merits of the addition made by the Assessing Officer and, therefore, in deference thereof, we also proceed to adjudicate the merits of the addition. On this aspect, the grievance of the assessee is articulated by way of Ground of appeal no. 2, whereby it is canvassed that the provisions of Sec. 2(22)(e) of the Act are inapplicable in the context of the amount of Rs. 13,00,00,000/- advanced by Portescap to Videojet inasmuch as it is not in the nature of loan as sought to be characterized by the Assessing Officer. As per the appellant, the amount of Rs. 13,00,00,000/- given by Portescap to Videojet is in the nature of an ICD as distinct from a loan. Pertinently, the aforesaid plea of the assessee is based on the proposition that the payment referred to in Sec. 2(22)(e) of the Act is "by way of advance or loan". The learned representative for the assessee referred to the judgments of the Hon'ble Bombay High Court in the case of Durga Prasad Mandelia vs ROC, (1987) 61 C....
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....d that the depositor has given the deposit for its benefit in the form of earning of interest. Clause (6) of the agreement has also been brought-out to show that the purpose of Videojet, the acceptor, to use the funds deposited has been identified, namely, to finance the activities of Videojet, in particular, for purchase of fixed assets, to improve its commercial distribution network and to meet other working capital requirements. The clause has been emphasised by the learned representative to say that the depositor, i.e. Portescap imposed this condition in order to safeguard its money. Even clause (5) relating to repayment and termination has been referred to say that there is no pre-determined repayment schedule set-out which usually exists in case of a Loan agreement. In the present case, the Principal amount is repayable by Videojet in unequated instalments over the tenure of the deposit depending on the cash generation from its operations. Clause (7) of the Deposit agreement has been referred to point out that it entitles the depositor, i.e. Portescap to ask for immediate repayment of the deposit in the event that the acceptor, i.e. Videojet becomes insolvent or will be unabl....
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....drawn is that it is a case of a 'loan' and, therefore, the Assessing Officer was justified in invoking Sec.2(22)(e) of the Act. 18. We have carefully considered the rival submissions. Ostensibly, Sec. 2(22)(e) of the Act creates a deeming fiction in terms of which an amount paid otherwise than as a dividend is brought into the tax net as 'dividend', subject of course, to the fulfilment of other conditions prescribed therein. The Hon'ble Supreme Court in the case of Gopal and Sons (HUF) vs CIT, 391 ITR 1 (SC) noticed the aforesaid feature of Sec. 2(22)(e) of the Act and laid down that it is to be given a strict interpretation. In other words, as per the Hon'ble Supreme Court, since the provision extends the definition of 'dividend' on an artificial basis, strict interpretation is to be given in order to bring any amount into its fold. Thus, what can be safely deduced at the present is that unless a particular sum fulfils all the stated conditions of Sec. 2(22)(e) of the Act, the same cannot be brought to tax as a 'deemed dividend'. It is in this manner that one has to appreciate the stand of the assessee that the payments sought to be covered in Sec. 2(22)(e) of the Act a....
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....t of the controversy, we deem it fit and proper to refer to certain clauses of the Deposit agreement which would bring out the salient features of the transaction as understood by both the parties, i.e. Portescap and Videojet. The relevant clauses are :- "1. Deposit The Depositor will lend to the Acceptor a deposits of an amount upto Rs. 15,00,00,000/- (Indian Rupees Fifteen Crores only) under the provisions as set forth hereinafter. 2. Deposits Term The term of the deposits is two years from initial drawdown, which can be further extended for one year if agreed by both parties. 4. Interest The Acceptor shall pay interest on outstanding deposit as per the below terms on quarterly basis Interest shall be paid at the rate of three months MIBOR + 0.5% prevailing on the first working date of applicable quarter. Interest shall be payable at the end of the quarter on reducing balance through account payee cheque or by electronic fund transfer (EFT) subject to TDS as per Income Tax Act, as applicable. 5. Repayments The Acceptor will repay the principal amount in un-equated instalments over the tenure....
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....re of a loan. In our considered opinion, the said approach of the Revenue is not justified because one of the clauses of the agreement cannot be read de hors the other clauses so as to infer the nature of the transaction. In fact, the DRP in para 4.8 of its order referred to the judgment of the Hon'ble Madhya Pradesh High Court in the case of Sharda Talkies (Firm) (supra) and has reproduced its extract, which brings out that "what should be regarded is the cumulative effect of the evidence which bears on the character of the debt as a loan or a deposit". We are referring to the aforesaid proposition for the fact that if the purpose of utilisation of the funds in clause (6) was the sole guide to treat it as a 'loan', then clause (7), which deals with the termination of the agreement, clearly brings out to the contrary. In fact, clause (7) brings out that the depositor, i.e. Portescap shall be entitled to ask for immediate repayment of the deposit in certain situations. This kind of a clause would be conspicuous by its absence in the case of a loan. In fact, to say that because of clause (6) it was to be inferred that it is Videojet who required the funds and, therefore, it raise....
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....to the plea of the assessee raised in the Additional Ground of appeal, as our subsequent discussion would show. Therefore, we may first take up the Additional Ground of appeal preferred by the assessee. 24. By way of Additional Ground of appeal it is contested that the impugned sum is also not taxable under the India-Mauritius Tax Treaty. The Additional Ground so raised, does involve a point of law and the relevant facts being available on record, the same is admitted for adjudication following the principles laid down in the case of National Thermal Power Co. Ltd. vs CIT, 229 ITR 383 (SC). This was put across to the parties and, therefore, both the counsels made their respective submissions on merits. 25. As per the assessee, it is a tax resident of Mauritius and the DRP in its order dated 23.12.2016 held that 'deemed dividend' in question is not covered within the meaning of the expression "dividend" used in Article 10(4) of the India-Mauritius Tax Treaty. The learned representative pointed out that in Assessment Year 2010-11 also, the CIT(A) went by the stand of the DRP dated 23.12.2016 and took the view that the 'deemed dividend' was not covered within the definition of '....
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....', then the same is also to be understood as 'dividend' for the purpose of the Treaty. Therefore, for the said reason, we are unable to accept the plea of the assessee contained in the Additional Ground of appeal. Thus, on this aspect, assessee has to fail. 27. Now, we may come back to Ground of appeal no. 3, wherein the controversy is the rate of tax applied by the income-tax authorities. In this context, the Assessing Officer has taxed the dividend at 42.23% on gross basis. As per the assessee, it was to be taxed @ 5% in terms of Article 10 of India-Mauritius Tax Treaty. The stand of the Assessing Officer is based on the decision of the DRP that 'dividend income' as per Sec. 2(22)(e) of the Act is not dividend as understood for the purposes of India-Mauritius Tax Treaty. 28. In this context, in the earlier paras we have already held that it is wrong to say that 'deemed dividend' in question is not be understood as 'dividend' for the purposes of India-Mauritius Tax Treaty. Once it is held that the impugned deemed dividend is also of the nature of dividend for the purposes of India-Mauritius Tax Treaty, we find that the applicable rate of tax is 5% as correctly canvassed by a....
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.... the assessment without giving reasonable opportunity of showing cause against the assessment as required under Section 251(2) of the Act. 4.2 The CIT(A) further erred in invoking third limb of Section 2(22)(e) of the Act. 4.3 The CIT(A) erred in not providing any opportunity to the Appellant and not appreciating that the Appellant has not derived any benefit out of the transaction and she further failed establish any tangible benefit being derived by the Appellant. 4.4 The Appellant prays that treating the ICDs of Rs. 90,00,00,000 as dividend under Section 2(22)(e) of the Act is erroneous, unwarranted and be deleted. Ground 5 - Rectification of error in the rate of tax applied on alleged dividend income 5.1 Without prejudice, on the facts and circumstances of the case and in law, the AO erred in computing and the CIT(A) in confirming the tax on alleged dividend of Rs. 92,00,00,000 at 21.115% on gross basis as against 5% on gross basis under Article 10 of India-Mauritius Tax Treaty ('Tax Treaty') as adopted in the assessment order." 31. In this year, the relevant facts are that Portescap had advanced monies totalling to Rs. 90,00,00,0....
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....brought out by the assessee before the Assessing Officer as well as before the CIT(A). On this aspect, the Assessing Officer has not made any averment, so however, the CIT(A) has not agreed with the assessee. As per the CIT(A), shares of GVR were acquired by assessee on 17.03.2010 from Videojet and even on the three dates when monies were advanced by Portescap to GVR, assessee was holding the entire shares of Videojet, which in turn was holding 100% of the shares of GVR, which made GVR a step-down subsidiary of the assessee-company. As per the CIT(A), since assessee was having 100% shareholding of Videojet, which in turn had 100% shareholding of GVR, it would make assessee a beneficial shareholder of GVR, thus attracting the deeming provisions of Sec. 2(22)(e) of the Act in the hands of the assessee-company. The CIT(A) justified the taxation of the impugned sum u/s 2(22)(e) of the Act also on account of third limb of Sec. 2(22)(e) of the Act whereby any payment made for the benefit of the shareholder (being either a registered and a beneficial shareholder), would result in addition u/s 2(22)(e) of the Act in the hands of the assessee-company. 33. Before us, the learned represent....
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....were given by Portescap to GVR, assessee was a beneficial shareholder in GVR. In our considered opinion, the conditions prescribed in Sec. 2(22)(e) of the Act in order to treat an amount as 'deemed dividend' are to be strictly interpreted and in that light the approach of the CIT(A) is quite untenable. Apart from making a bland assertion, the CIT(A) does not justify as to how assessee became a beneficial shareholder of GVR inspite of it not having any direct shareholding on the relevant dates, but by simply holding shares of its subsidiary, Videojet. Further, the CIT(A) invoked the third limb of Sec. 2(22)(e) of the Act whereby a payment made for the benefit of a shareholder is also regarded as 'dividend' within the meaning of Sec. 2(22)(e) of the Act. In this context, we find that neither in the assessment order nor in the order of CIT(A) there is any material to point out that the payment in question made by Portescap to GVR was for the individual benefit of any shareholder of Portescap; and, in any case it cannot be straightaway inferred that the payments made on 29.10.2009, 02.03.2010 and 03.03.2010 to GVR were for the individual benefit of the assessee considering that assesse....