TaxTMI 
TaxTMI 
2021 (5) TMI 653
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....appeal. 3. Brief facts of the case as culled out from the records are that the assessee is a Private Limited Company engaged in manufacturing of conveyer belts and other rubber products. Return of income u/s 139(1) of the Act for Assessment Year 201-12 was filed on 30.09.2012 declaring total income at Rs.NIL. The case was reopened u/s 147 by issuance of notice u/s 148 of the Act on 30.03.2017 for escapement of deemed dividend u/s 2(22)(e) of the Act in its hands. During the assessment proceedings Ld. A.O observed that assessee company received loan of Rs. 1 crore from Vimal Sneh Pvt. Ltd having accumulated profit of Rs. 93,55,409/- loan of Rs. 33,92,842/- from M/s Jain Transmission (I) Pvt. Ltd having accumulated profit of Rs. 39,24,025/- and received loan of Rs. 86,95,000/- (of which Rs. 30,75,000/- was paid during the year) from M/s Rajkamal Builders P Ltd having accumulated profit at Rs. 6,06,91,862/- and all these three companies have common share holder namely Mr. Punyapal Surama holding 26.32%, 39.87% and 36.90% respectively of the total share holding of the three companies. Mr. Punyapal Surana is also a substantial shareholder holding 25.35% of total shareholding of asses....
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.... therefore submitted dividend can be taxed in the hands of the shareholder only. Loan u/s. 2(22)(e) is deemed to be a dividend, but nowhere it is stated that such dividend would be taxed in the hands of borrower; even if it is not a shareholder. The deeming fiction of section 2(22)(e) cannot be stretched beyond the scope it is given. Dividend cannot therefore be taxed in the hands of assessee company. Strong reliance is placed on the order of Id CIT(A) who has given similar findings at 11 to 21 of his order in para 4.0 to para 4.10. Gist of the landmark judgments in this regard are quoted as below: - Sr. No. PB Ref. Citation Gist of the case 1 PB 144-145 CIT Vs Venkatesh Breverages (ITA 24 of 2012) (M.P. High Court) Keeping in view the reasons as indicated herein above, we are also satisfied that for attracting the deeming provisions as contained u/s 2(22)(e), both the situations contemplated therein should be fulfilled. If one of the condition is not fulfilled. The provisions cannot be attracted. In this case, one of the condition is not fulfilled, in as much as the Assessee/company is not a shareholder in the lending company, from which the loan w....
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....tional Pvt. Ltd (Assessee) 25.35% 2 Vimal Sneh Pvt. Ltd 26.32% 3 Jain Transmission (I) Pvt. Ltd 39.87% 4 Rajkamal Builders 36.90% 9. The assessee company received loans from following 3 companies (details also included accumulated profits of lender companies); S.No. Name of Company Loan Received Accumulated profit Amount added u/s 2(22)(e) 1 Vimal Sneh Pvt. Ltd 1,00,00,000 93,55,409 1,00,00,000 2 Jain Transmission (I) Pvt. Ltd 33,92,842 39,24,025 33,92,842 3 Rajkamal Builders 86,95,000 6,06,91,862 86,95,000 2,20,87,842 10. The above details shows that there is a share holder namely Shri Punyapal Surana who has substantial share holding as provided u/s 2(22)(e) of the Act in all the four concerns enumerated above. The assessee's company has received loans from other three concerns. It is not the case of the assessee that falls in any exclusion provided in Section 2(22)(e) of the Act and that the alleged transactions between these companies are in the ordinary course of business where lending of money is a substantial part of the business of the c....
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....hareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956); (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company). Explanation 1.-The expression "accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956. Explanation 2.-The expression "accumulated profits" in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in ....
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....ble since revenue has not made a case that the alleged payments have been made for the individual benefit of the share holder namely Punyapal Surana. Now remainins second limb which deals with the situation where the payment is made by the company to any concern in which said share holder is a member or a partner having substantial interest. In the instant case Mr. Punyapal Surana is a substantial share holder in all the four companies which includes the assessee company and three lender companies. Whether under these given facts the action of the Ld. A.O of making addition u/s 2(22)(e) of the Act is justified or not needs to be tested in the light of settled judicial precedents. 16. Though the Ld. Counsel for the assessee as well as Ld. CIT(A) has referred to various judgments but in our considered view the judgment of Hon'ble Supreme Court in the case of National Travel Services V/s CIT (supra) is very relevant on the facts of the case. The facts before the Hon'ble Apex Court were with regard to the assessee firm to subscribe to the equity capital in a company in the name of its two partners who held shares for and on behalf of the firm which happen to be for the be....
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....ious years immediately preceding the previous year in which such acquisition took place; Explanation 3. - For the purposes of this clause,- (a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company; (b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern;" 11) The Explanatory memorandum to the amendment thus made reads as follows:- "With the deletion of Section 104 to 109 there was a likelihood of closely held companies not distributing their profits to shareholders by way of dividends but by way of loans or advances so that these are not taxed in the hands of the shareholders. To forestall this manipulation, sub-clause (e) of clause (22) of Section 2 has been suitably amended. Under the existing provisions, payments by way of loans or advance to shareholders having substantial interest in a company to the extent to which the company possesses accumulated profits is treated as dividend. The shareholders ....
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.... to not less than 20% of the income of such concern. 17. The judgment of Hon'ble Delhi High Court in the case of CIT v/s Ankitech Pvt. Ltd relied by Ld. CIT(A) have also been considered by the Hon'ble Apex Court in the case of National Travel Services (supra). As regards the remaining judgments/decisions relied by the Ld. Counsel for the assessee the same are not applicable on the instant case as the facts are not similar and are thus distinguishable. 18. In the instant case we find that one person namely Shri Punyapal Surana is a substantial shareholder in all the four companies which includes three lender companies and one receiver company. The Second limb of Section 2(22)(e) of the Act is very much clear that deemed dividend includes any payment made by the company not being a company in which the public are substantially interested, made after 31.8.1987, by way of advance or loan to any concern in which such share holder is a member or partner and in which he has substantial interest. Further Explanation (3)(a) to Section 2(22)(e) provides that concerns means a HUF or a firm or an association of persons or a body of individuals or a company and the person shall be....