TaxTMI 
TaxTMI 
2023 (8) TMI 418
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....p of Company the main source of income is from house property and income from other sources. During the assessment proceedings Assessing Officer observed that assessee has claimed long term capital gain on sale of shares of the scrip Sharp Trade and the details are as under: - Sr. No. Number of Shares Sale of Shares Date Total Sale Price Rs. 27,99,270/- 1 25000 shares purchased, Omnitech Petroleum Ltd. /Sharp Trading Co, now known as Trinity Tradelink Ltd., 07.03.2014 & 19.03.2014 1,500 shares for Rs. 14,74,650/ - & 1350 shares for Rs. 13,24,620/- 4. Assessing Officer observed that assessee earned long term capital gain during this year and claimed it as exemption u/s. 10(38) of the Act. The quantum of huge long term capital gain was found to be suspicious and detailed investigation was undertaken by the Kolkata Investigation wing into 84 Penny Stocks (Trinity Tradelink Ltd., {in short "TTL"}) and has given detailed findings indicating bogus LTCG/STCG entries claimed by large number of beneficiaries. He has discussed the modus operandi involving operators, intermediaries and the beneficiaries has been detailed in the above said inve....
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....S-18 and accordingly, the Inter-Corporate Deposit (ICD) of Rs.. 1.5 Crores has been declared as related Party Transaction in the financial statement. In view of the above, assesse was show caused as to why the amount of Rs.. 1.5 Crores should not be added to the total income attracting section 2(22)(e) of the Act. 7. In response assessee filed reply dated 19.12.2016 as under: "........B. Taxability of ICD received from Group Company as Deemed Dividend in the hands of the assessee. Your honor has requested us to show cause as to why the Inter Corporate Deposit of Rs. 1,50,00,000/- given by Madhu Mattor Private Limited (MMPL) [Lender] to Madhu India Decc Limited (MIDL) [Borrower) should not be treated as Deemed Dividend in the hands of the beneficiary shareholders of MIDL within the meaning of Sec. 2(22)(e) of the Income Tax Act, 1961 based on the assessment order for A.Y 2014-15 made in the case of MIDL by ACIT 15(2X2)dated November 02, 2016. The assessee and his wife are common shareholders in MMPL & MIDL. The ICD has been advanced by MMPL to MIDL MIDL does not hold any shares in MMPL. We would like to submit that provision of Section 2(22)(e) of the Act cannot be invok....
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....o is entitled to receive the dividend. In this regard we would like to draw your attention to the following Judicial Decisions confirming that the Loans given to Non-Shareholder cannot be treated as Deemed Dividend within the meaning of Section 2(22)(e)..... Assessee also relied on various case laws in his reply. AR of the assessee also submitted as under:- We would like to respectfully submit that this alleged deemed dividend of Rs. 1,50,00,000/- has already been added to the income of the recipient of ICD, MIDL in the assessment order and set off against the loss for the year. We attach herewith in Annexure 10 a copy of the assessment order highlighting the addition to the income. Under these circumstances taxing the same income in the hands of the assessee will amount to double taxation of same income once in the hands of MIDL & second time in hands of the assessee. This double taxation of same income is not tenable and justified.....". 8. After considering the submissions of the assessee, Assessing Officer rejected the same and observed that it is undisputed fact that the assessee is holding more than 10% in both the companies. Further, assessee holds more ....
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....the assessee, therefore, the said capital gains were added under section 68 as unexplained cash credits. 5.2.8 Having discussed the facts of the case and the judicial precedents relied upon, I am of the considerate view that the addition made by the Ld. AO of Rs. 27,99,270 is justified and does not call for any interference. Accordingly, these grounds of appeal are dismissed." 11. With regard to the addition u/s. 2(22)(e) of the Act assessee has filed detailed submissions before the Ld.CIT(A) and for the sake of clarity it is reproduced below:- 3) Addition of Deemed Dividend u/s. 2(22)(e) of the Income Tax Act, 1961 "The learned AO has erred in addition of Rs. 1,50,00,000/- as Deemed Dividend u/s. 2(22)(e) of the Income Tax Act, 1961 under the head Income from Other Sources on the ground that the assessee holds more than 10% in both the Companies and more than 20% of the share holding pattern in the company in which the loan is received. The learned A.O also erred in adding 100% of the deemed dividend in the hands of the assessee even though his shareholding in the beneficiary company was 50.84%" 3.1) Facts The Inter Corporate Deposit....
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....ers/Directors hold more than 20% in both the companies but Madhu India Deco Limited (MIDL) does not hold any single share in Madhu Mattor Private Limited (MMPL) a lending Company. Thus the ICD placed by MMPL in MIDL is not in the nature of Loan or Deposit given to its registered Shareholder. MIDL is not a shareholder in MMPL. iv) During the previous year relevant to the assessment year under consideration MMPL has utilized its surplus funds to deploy in ICD with MIDL as a part of its financing activity during the normal course of business. This is evident from the attached Cash Flow Statement of MMPL for the relevant period v) Furthermore, from the perusal of the details of utilization of the ICD placed by MMPL in MIDL,it can be seen that the entire ICD amount has been utilized by MIDL for retirement of the trade dues. No part of the ICD has been diverted, utilized or accrued to the ultimate common shareholders being the Promoters/Directors of MIDL & MMPL. Thus it is clearly established that no part of the ICD has directly or indirectly accrued to the eventual shareholder who is entitled to receive the dividend, 3.5) LD. AO made the addition u/s 2(22)(e) ....
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....es entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any 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) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; but "dividend" does not include- i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets; (ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965; (ii) any advance or loan made to a shareholder or the said concern by a c....
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.... Judicial Decisions confirming that the Loans given to Non - Shareholder cannot be treated as Deemed Dividend within the meaning of Section 2(22)(e). • Bombay High Court in case of CIT vs. Jignesh P. Shah ITA No.197/2013 [2015-ITRVHC-MUM-108] has held that the provision of section 2(22)(e) cannot be invoked unless the assessee itself is the shareholder of the company, who was lending money to him. • Delhi High Court in CIT vs. Ankitech P. Ltd. [2011-ITRV-HC-DEL- 109] has held that S. 2(22)(e) "deemed dividend" not assessable if recipient is not shareholder. This is confirmed by the honourable Supreme Court. • Delhi High Court in case of CIT vs. Mcc Marketing Pvt. Ltd, ITA No. 599/2011 has held that provision of section cannot be invoked in case of amount advance by one company to another, who is not a shareholder of the company; shareholding of common director cannot be taken into consideration for that purpose. • Bombay High Court in CIT vs. Impact Containers Pvt. Ltd [2014- ITRV-HC-MUM-112] has held that the law laid down in Universal Medicare 324 ITR 263 (Bom) (approving Bhaumik Color 313 ITR 146 (SB)), that s 2(22)(e) does not....
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.... shares exceeding the limits specified in Section 2(22)(e) of the Act. The. ITAT held that the amount of deposit could not be taxed as deemed dividend in the hands of the assessee company since it was not a loan. Madhya Pradesh High Court in the case of Sharda Talkies (Firm) vs. Smt. Madhulata Vyas (AIR 1966 MP 68) observed as under: "There is a subtle distinction between a deposit and a loan. In the case of a loan, the amount is given by the creditor to the debtor at the request of and for the requirements and dues of the debtor under certain terms and conditions, In the case of a deposit, the depositee receives money at the instance of the depositor. In the case of a deposit, the requirement of the depositee is neither relevant nor material. The depositor has to go to the depositee for depositing the amount or the depositee may go and collect the amount. But in case of a loan, the debtor has to request the creditor to advance certain amount for meeting his requirement for using the amount. However, the question in a given case whether the debit is deposit or a loan will be one of fact which will have to be decided on the facts and circumstances of each case. The use of t....
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....ces, according to us the authorities below were not right in treating the same as deemed dividend under section 2(22)(e) of the Act." Further more in the case of M/s IFB Agroind Ltd. Vs JCIT-ITA no. 114/Kol/2013 Kolkata ITAT the following was held: * The provisions of section 2(22)(e) of the Act refers to only 'loans' and 'advances' it does not talk of a 'deposit'. The fact that the term 'deposit' cannot mean a 'loan' and that the two terms 'loan' and the term 'deposit' are two different distinct terms is evident from the explanation to section 269T as also section 269SS of the Act where both the terms are used. In section 269T of the Act, the term 'deposit' has been explained vide various circular issued by CBDT. Thus, the view taken by the Ld. CIT (A) that the Inter-corporate deposit is similar to the loan would no longer have legs to stand. In Housing & Urban Development Corporation Ltd. 102 TTJ (Del.) (SB) 936, it was held that that loans and deposits are to be taken different and distinct. Following the decision of the coordinate bench of this Tribunal in the case of Bo....
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....ces were received by assessee in normal course of business as a matter of business expediency and, hence, said advance was not covered by section 2(22) (e). On appeal by revenue the Court held that finding of facts recorded by Tribunal could not be interfered with. Dy. CIT .v. Chariot International P. Ltd. (2014) 29 ITR 36 (Chennai)(Trib.) The assessee was 100% EOU engaged in the business of conversion of rough granite blocks into polished granite slabs, granite tiles and monuments. During the assessment proceedings, the AO found that 2 individuals S and V held shares in the assessee with voting power of 75% and 25% respectively. S also held 66.8% of the voting rights of a sister concern which had accumulated profits and also had credit balance in the name of the assessee. Therefore, the AO held that there was a loan or advance within the meaning of section 2(22) (e) of the Act and treated the amount of accumulated profit as deemed dividend and disallowed the benefits of deduction u/s. 10B. The CIT(A) deleting the addition made by the AO held that the transactions of the assessee with its sister concern were commercial in nature and that the provisions of section ....
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....ued that the advances made was in the nature of inter corporate deposit and hence, not subject to provisions of Section 2(22)(e). The appellant has relied on plethora of decisions that have held that inter corporate deposits are not covered within Section 2(22)(e), however appellant has failed to furnish how the same in the nature of inter corporate deposit. It is the preliminary obligation of the appellant to discharge the onus of proving its contention. In the absence of the appellant complying with the basic requirement, the argument of the appellant is not tenable. 5.3.5 The appellant's argument that the amount is already taxed as deemed dividend in the hands of MIDL and hence, should not be taxed again also does not hold water as the provisions of Section 2(22)(e) are applicable to the appellant being the shareholder of the concern which has received the loan. 5.3.6 In light of the above facts, I find no infirmity in the addition made by the Ld. AO of Rs.1,50,00,000 u/s 2(22)(e) of the Act and uphold the same. This ground of appeal is dismissed." 13. Aggrieved assessee is in appeal before us raising following grounds in its appeal: - "1. Addit....
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....directly accrued to the shareholders, is bad in law and needs to be deleted. d. Without prejudice to the above and without admitting, on the facts and circumstances of the case and in law, Ld CIT(A) erred in confirming the addition of Rs. 1,50,00,000/- in the hands of appellant inspite of fact that the same addition is already made in the hands of recipient of ICD i.e. MIDL. e. Without prejudice to the above and without admitting, on the facts and circumstances of the case and in law, 100% addition of deemed dividend made in the hands of appellant even though his shareholding in the beneficiary company was 50.84 percent, is bad in law and needs to be deleted." 14. At the time of hearing, Ld. AR brought to our notice relevant facts of the case and filed written submissions. For the sake of clarity, it is reproduced below: - "2. With regard to Ground of appeal no.1 Addition of sale proceeds of shares u/s. 69 of Rs.27,99,270/- assessee submitted as under: - 3. This issue is dealt with by the learned AO at para 5 to 10, pages 2 to 12 of the assessment order. 4. It is adjudicated by the learned CIT(A) at para 5.2 to 5.2.8, pages 35 to 39 o....
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....ot the approval of Name Change on dated March 28, 2014, thus the company OMNITECH PETROLEUM LIMITED is now known as TRINITY TRADELINK LIMITED [TTL). • As a result of implementation of merger Scheme Company's share price shot up abruptly and peaked due to better future prospects. • The Company is still traded on Mumbai Stock Exchange and there was never any reported suspension in trading due to SEBI or BSE investigation. • Appellant had no control over the abnormal rise in price and had capitalized on the substantial appreciation opportunity, that too only in respect of 2850 shares out of total shareholding of 60,000 shares. • If the transaction were of bogus nature for some extraneous consideration, the appellant would have sold the entire holding. 9. The appellant gave a detailed legal submission vide letter dated 19.12.2016 enclosed at pages 40 to 45 of the paper book. 10. Request was also made to the learned AO for providing opportunity for cross- examination of the persons who have alleged/investigated that the share trading is in Penny Stock resulting in the bogus capital gain. Observations Of t....
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....owever, the learned CIT(A) held that the said issue needs to be seen from the perspective of human probabilities and relied on the following decisions. • Sumati Dayal 214 ITR 801 (SC) - Para 5.2.7, page 37 of the CIT(A) Order. • Shamim Imtiaz Hingora vs ITO (ITA No. 1875/Pune/2018) Para 5.2.8, . pages 37 and 38 of the CIT(A) Order. • 13.3. The learned CIT(A) has relied on the following decision for not allowing cross examination. • Pankaj Agarwal & Sons (HUF) vs ITO (ITA No. 413/Chennai/2018) - Para 5.2.6, page 38 of the CIT(A) order. Appellant's submissions: 14. The appellant relies on the submissions made during the assessment and first appellate proceedings wherein complete details with documentary evidences regarding the said transaction of capital gains was submitted. 15. Copy of the Investigation Report issued by DIT (Inv.) Kolkata relied on by the learned AO and CIT(A) was requested on the basis of which Trinity Tradelink Limited was identified as Penny Stock and the evidences gathered on the basis of which the LTCG derived from them are regarded as Bogus Capital Gains. See pages 41 and 45 of ....
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....ITA No.1089/Kol/2018 • DCIT vs Shri Ghanshyam Agarwal ITA No. 532/JP/2019 • Seema Tayal vs ITO (ITA No. 1132 of 2018 Del) 22. Reliance is placed on following other decisions wherein additions relating to bogus capital gains has been deleted. • ITA No. 3801/Mum/2011 Ms. Farrah Marker Vs. Income Tax Officer 19(3)(1) • M/s Indravadan Jain HUF AND ITA No.5168/Mum/2014 AY :2005-2006) • Manish Kumar Baid vs. ACIT, (I.T.A. No1236/Kol/2017 dated 18-08-2017 • CIT v. Shyam R. Pawar [2015] 54 taxmann.com 108 (Bombay) • CIT vs Smt. Sumitra Devi [2014] 49 taxmann.com 37 (Rajasthan) • CIT vs Ms. Arvind Kumar Jain HUF, ITA No. 4862/Mum/2014 dated 18.09.2017 23. Cross examination decisions. Reliance is placed on following decisions:- • Smt. Sunita Dhadda v. DCIT [2013] 33 taxmann.com 639 (Jaipur-Trib) Dept's appeal in above case to Rajasthan High Court and SC were dismissed • Andaman Timber Industries vs CCE [2015] 62 taxmann.com 3 (SC) • CIT vs M/s. Ashish International ITA No. 4299 of 2009 dated 22.02.2011 (Bom HC) • Kam....
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....basis during the assessment of MIDL vide para 5.7, pages 8 & 9 of the assessment order Briefly three reasons are given for the said additions: a) The learned AO has placed reliance on CBDT Circular no. 495 dated 20.09.1987 which provides for taxing the same in the hands of recipient concern and not the shareholder. b) Amount is already deposited in the bank account of MIDL and any subsequent defalcation of funds is extraneous to the application of section 2(22)(e). c) MMPL is not into any money lending and borrowing business and has no license from RBI for the same. 31. In the case of the appellant, the learned CIT(A) confirmed the additions at para 5.3.3 to 5.3.5, pages 40 & 41 wherein the learned CIT(A) has referred to the second limb of section 2(22)(e) which requires taxing the same in the hands of the shareholder of recipient concern. The Learned CIT(A) has stated that the appellant did not prove that it is ICD. 32. In the case of MIDL, the said additions are deleted by the learned CIT(A) vide order dated 02.12.2019 vide para 2.5, pages 27 and 28 of the said order. The Department is in further appeal against the relief provided by t....
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....or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off" Non-applicability of section 2(22)(e) in the case of ICD AND business expediency. 35. It is important to understand that the term "loans and advances in section 2(22)(e) does not cover within its ambit "deposit 36. The Hon'ble Supreme Court in the case of Gopal and Sons (HUF) v. CIT [2017] 77 taxmann.com 71/245 Taxman 48/391 ITR 1 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'. 37. It is in this manner that one has to appreciate that the payments sought to be covered in Sec. 2(22)(e) of the Act are ....
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....sale of Rs 2,28,28,863/- by MIDL to MMPL throughout the year. Thus your Honours will appreciate that said ICD is given in the course of the business of the MMPL and MIDL. Infact the entire proceeds of ICD is also utilized by MIDL to repay outstanding bills on account of purchases made by MIDL from MMPL. The appellant has not used the funds for himself but it is used for business purpose of the company only. On receipt the payment for business purpose is made on the same day. 41. Thus it being ICD and also it is given in the normal course of the business, accordingly provisions of section 2(22)(e) are not attracted. Reliance is placed on the following decisions. * Seamist Properties P. Ltd vs. ITO (95 TTJ 201) (Mumbai ITAT) * Bombay Oil Industries Limited vs DCIT [2009] 28 SOT 383 (Mumbai) * KIIC Investment Company vs DCIT [2019] 101 taxmann.com 19 (Mumbai - Trib) * DCIT vs M/s. Subhkam Monetary Services Pvt Ltd. ITA No. 6018/Mum/2009 dated 30.11.2011 * DCIT vs Nirmala C Thumar ITA No. 5624/Mum/2016 dated 03.10.2018. * DCIT vs M/s Pathik Constructions ITA No. 1498 & 1499/Mum/2012 dated 13.02.2015 * DCIT vs Jatee....
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....f shares holding 10 per cent voting power (c) The very same person referred to in (b) above must also be a member or a partner in the concern holding substantial interest in the concern. 47. As mentioned earlier, the appellant i.e. Shri Anand Gupta does not obtain any benefit arising out of the said ICD being given by MMPL to MIDL as entire amount is used by MIDL to repay trade creditors Accordingly the appellant not being a beneficial shareholder but only a registered shareholder, he cannot also be subject to the provisions of section 2(22)(e). 48. Reliance is placed on the following decisions * CIT v Universal Medicare (P) Ltd (2010) 324 ITR 263 (Bombay) * CIT vs Impact Containers (P) Ltd [2014] 48 taxmann.com 294 (Bombay) * ACIT v Britto Amusement (P.) Ltd [2014] 49 taxmann.com 256 (Bombay) * CCIT v Sarva Equity (P.) Ltd [2014] 44 taxmann.com 28 (Karnataka HC) * CIT vs. Ankitech (P.) Ltd [2011] 11 taxmann.com 100 (Delhi HC) * ACIT vs Bhaumik Colour (P) Ltd (2009) 118 ITD 1 (Mum SB) * Neha Builders P Ltd. vs DCIT (2018) 98 Taxmann.com 465 (Mum ITAT) 49. We wish to submit that the de....
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....umber of shares held by the assessee became 60000. During the current assessment year assessee sold 1500 and 1350 shares for a total consideration of Rs.. 27,99,270/-. Assessee held these shares for more than one year and claimed the capital gain earned through this transaction of Rs.. 15,50,220/-. As per the facts on record, we observe that assessee has filed all the documents relating to these transactions meticulously and sold these shares through the operators namely Rinam Dealmark Pvt. Ltd., and Diganta Properties Pvt. Limited. These entities are based in Kolkata and these are known as exit entry providers. We observe that this scrip and the manner it has behaved in the market clearly indicate that this is peculiar case of penny stock and there is no doubt that in the present case assessee has bought the shares and sold the shares through the operators who are under the scanners of the department as entry and exit operators. Even though there is no direct link was established by the tax authorities, however, the action of the assessee is clearly indicate that he has purchased those shares off-market and offloaded the same in the BSE. This transaction has contained all the ingr....
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....s. Rs.2,62,33,800/- as deemed dividend in the hands of the assessee on the reasoning that the transactions of advancing loan to the companies as discussed above falls within the purview of the provisions of section (2)(22)(e) of the Act which has been elaborated and discussed in the preceding paragraph. However, the learned CIT (A) was pleased to delete the addition made by the AO for the reasons as discussed in the aforesaid paragraphs. 9.1 The 1st question before us arises whether it is sine qua non that the assessee, being a registered shareholder has to obtain the benefit out of the loan provided to the companies in which he was holding the substantial interest. In this regard we find pertinent to refer the provisions of section 2(22)(e) of the Act which reads as under: (22) "dividend" includes- XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXX (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 shareholder, being a person who is th....
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....r in the company, which have been routed through different modes/concerns. What needs to be taxed as deemed dividend is the amount ultimately used for the benefit of the shareholder. It is not the case of the Assessing Officer in the reasons recorded for reopening the assessment that the petitioner has received any amount as holder of substantial shares from the loan giver company or the loan receiver company. Therefore, in the absence of any benefit having been received by the petitioner, there was no obligation cast upon him to disclose such transactions. Once it is established that there is no benefit accrued to the assessee out of the loan transactions as discussed above, the provisions of section 2 (22)(e) of the Act cannot be attracted. 9.4 Moving further, we also note that the assessee has contended before the AO that the loans has been advanced by the company, JP infrastructure to the parties as discussed above as inter corporate deposits. The relevant submission of the assessee stands as under: Without prejudice to the above submissions, it is further submitted that in the present case, inter corporate deposits (ICD) ICD during the normal course ....