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Income Tax Appellate Tribunal, DELHI “C” BENCH: NEW DELHI
Before: SHRI MAHAVIR SINGH & SHRI MANISH AGARWAL
The present appeal is filed by the assessee against the order of Ld. Commissioner of Income Tax (A)-30, New Delhi [“Ld.CIT(A)”] dated 29.03.2017 in Appeal No.132/16-17/2566 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 26.12.2016 passed u/s 147 r.w.s. 143(3) of the Act pertaining to assessment year 2012-13.
Brief facts of the case are that assessee is an individual, filed his return of income on 30.07.2012, declaring income of INR 30,42,800/-. The assessee is Director of M/s HBN Dairies & Allied Ltd. wherein he is having share holding of 54.90% in the company. The assessee is also Director of M/s. HBN Homes Colonizers Pvt. Ltd. where the assessee is having shareholding of 50%. The AO observed that M/s HBN Dairies & Allied Ltd. had advanced loans to M/s.HBN Homes Colonizers Pvt. Ltd. and since the assessee is having substantial interest in both the companies, therefore, such loan is assessed to be deemed dividend in terms of provision of section 2(22)(e) of the Act in the hands of the assessee. AO also observed that company M/s. HBN Homes Colonizers Pvt. Ltd. become 100% subsidiary of M/s HBN Dairies & Allied Ltd. w.e.f. 05.11.2011 thus, the amount of advance given during the year upto 04.11.2011 totaling to INR 28,14,70,430/- has to be treated the income of the assessee as deemed dividend. Accordingly, he recorded the reasons and initiated the reassessment proceedings u/s 148 of the Act by issue of notice on 27.07.2016. In response, assessee filed the return on 16.09.2016, declaring the same income as was declared in the return of income filed u/s 139(1) of the Act. Thereafter, the assessee sought the reasons recoded and filed detailed objections which were disposed off by the AO and finally, by holding that the assessee is the beneficial owner of the amount received by M/s. HBN Homes Colonizers Pvt. Ltd. as loan from M/s HBN Dairies & Allied Ltd. upto 04.11.2011 of INR 28,14,70,430/- and accordingly, the same is added in the hands of the assessee as deemed dividend u/s 2(22)(e) of the Act.
Against this order, an appeal was filed before the Ld. CIT(A) who vide impugned order dated 29.03.2017 dismissed the appeal of the assessee.
Aggrieved by the said order, the assessee is in appeal before the Tribunal wherein following grounds of appeal are taken by the assessee:- 1. “Under the facts and circumstances of the case, the Id. First Appellate Authority has grossly erred in affirming the addition of 28,14,70,430/- made by the Ld. Assessing Authority u/s 2(22)(e) of the Act to the returned income of the appellant, which is grossly injudicious, unwarranted, against the facts and bad at law.
2. Under the facts and circumstances of the case, the assessment order passed by the Id. Assessing Authority u/s 147/143(3) of the Act and affirmed by the Id. First Appellate Authority is invalid and bad at law.
3. The appellant prays for leave to add, amend, alter or withdraw any grounds of appeal.”
5. Before us, Ld.AR of the assessee made three fold arguments; firstly, it is submitted that the provisions of section 2(22)(e) of the Act were invoked for making the additions however, the lower authorities had failed to appreciate the fact that such dividend is exempted u/s 10(34) of the Act r.w. section 115O of the Act according to which when due taxes are paid by the company who is paying the dividend, the income is exempt from tax in the hands of recipient. It is further submitted that in the instant case though no tax was paid by the company however, it is the default on its part for which the assessee could not be held as responsible. It is further submitted that Principal Officer of the company who had made the payment of loan to the other company be held officer in default.
Therefore, the said loan which is treated as deemed dividend in the hands of the assessee is exempt u/s 10(34) of the Act. For this, reliance is placed on the judgment of Hon’ble Madras High Court in the case of R.Chitra vs Vice Chairman, Income Tax Settlement Commission [2020] 120 taxmann.com 49 (Madras).
6. The other arguments of the assessee is that the company M/s HBN Dairies & Allied Ltd. had not accumulated profits as referred in section 2(22)(e) of the Act. For this, ld. AR drew our attention to Paper Book page 68 which is Profit & loss Account of M/s HBN Dairies & Allied Ltd. for the year ended on 31.03.2010 where income of INR 41,71,48,618/- was declared as “miscellaneous income” which according to Ld.AR was the additional income offered as a result of search and is not earned from the regular business activity of the assessee company and therefore, the same cannot be treated as part of the accumulated profits of the assessee company. Ld.AR further submits that if the said amount is reduced from the reserves and surpluses as on 31.03.2011, there would be accumulated loss in the hands of the M/s HBN Dairies & Allied Ltd. It is thus, prayed that since there was no accumulated profits earned from the regular business activity and income declared under the miscellaneous income is the amount of surrender made by the company in terms of search carried out u/s 132 of the Act on 20.11.2009, wherein in the statements recorded u/s 132(4), this income was offered for tax, based on various documents found and seized during the course of search thus, this income is actually not earned but was on account of accounting issues and discrepancies found in search and should be excluded for the purpose of computing accumulated profits.
The third argument advanced by the Ld. Counsel for the assessee is that the advances given by M/s HBN Dairies & Allied Ltd. were commercial transactions. The company, M/s HBN Dairies & Allied Ltd. was entering into the business of real estate and for this purpose M/s. HBN Homes Colonizers Pvt. Ltd. was finally created as SPV and become 100% subsidiary of the company M/s HBN Dairies & Allied Ltd. w.e.f. 05.11.2011. Therefore, the entire loan given prior to such conversion was under commercial expediency and for the purposes of business therefore, this amount cannot be treated as deemed dividend in the hands of the assessee company. For this, reliance is placed on the judgement of Hon‘ble Delhi High Court in the case of CIT vs Raj Kumar [2009] 181 Taxman 155 (Delhi).
It is finally requested by Ld.AR that the amount of advance given by M/s HBN Dairies & Allied Ltd. to M/s. HBN Homes Colonizers Pvt. Ltd. was in the ordinary course of business and thus, provisions of section 2(22)(e) are not applicable. It is thus, requested to delete the additions made in this regard.
On the other hand, Ld. CIT DR for the Revenue vehemently supported the orders of the lower authorities and submits that AO at page 1 in para 2 clearly stated the facts of the case wherein it is observed that upto 04.11.2011, the company M/s. HBN Homes Colonizers Pvt. Ltd. was having 50% shareholding of the assessee who is having share holding of 54.90% in M/s HBN Dairies & Allied Ltd. and thus, the advances given by M/s HBN Dairies & Allied Ltd. to M/s. HBN Homes Colonizers Pvt. Ltd. is clearly fallen under the ambit of section 2(22)(e) of the Act more particularly the assessee is beneficial owner. Ld. CIT DR further submits that section 115O of the Act is not applicable on the deemed dividend and is applicable on the dividend declared in the normal course of business and therefore, the claim of the assessee that it is exempted u/s 10(34) of the Act is also without any basis. He thus, requested for the confirmation of the orders of lower authorities.
Heard the contentions of both the parties and perused the material available on record. There is no quarrel about the application of section 2(22)(e) of the Act between both the parties as the assessee was substantial shareholder in both the companies between whom the transaction of loans/advances was carried out during the year under appeal. The only dispute is with respect to whether such advance is to be treated as dividend u/s 115O and if yes, whether the addition could be made of the same or it is exempted u/s 10(34) of the Act.
11. First we see the provision of section 10(34) as existed in the year 2012-13 which reads as under:- 10. “In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included- ……. ……. (34) any income by way of dividends referred to in section 115-0"
12. Further, the assessee claimed that as per section 10(34) of the Act, the income by way of dividend is exempt as referred in section 115O of the Act which includes deemed dividend also, therefore, we must see the provision of section 115O of the Act as existed during the year under appeal which reads as under:-
"(1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2003, whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of [fifteen] per cent.]
[(1A) The amount referred to in sub-section (1) shall be reduced by,- (i) the amount of dividend, if any, received by the domestic company during the financial year, if- (a) such dividend is received from its subsidiary; 10[and] (b) the subsidiary has paid the tax which is payable under this section on such dividend:] (c) --- Provided that the same amount of dividend shall not be taken into account for reduction more than once; (ii) the amount of dividend, if any, paid to any person for, or on behalf of, the New Pension System Trust referred to in clause (44) of section 10. Explanation. For the purposes of this sub-section, a company shall be a subsidiary of another company, if such other company, holds more than half in nominal value of the equity share capital of the company.] (2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on distributed profits under sub-section (1) shall be payable by such company.
(3) The principal officer of the domestic company and the company shall be liable to pay the tax on distributed profits to the credit of the Central Government within fourteen days from the date of (a) declaration of any dividend; or (b) distribution of any dividend; or (c) payment of any dividend, whichever is earliest. (4) The tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid. (5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) or the tax thereon. [(6) Notwithstanding anything contained in this section, no tax on distributed profits shall be chargeable in respect of the total income of an undertaking or enterprise engaged in developing or developing and operating or developing, operating and maintaining a Special Economic Zone for any assessment year on any amount declared, distributed or paid by such Developer or enterprise, by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2005 out of its current income either in the hands of the Developer or enterprise or the person receiving such dividend 12[*]] [Provided that the provisions of this sub-section shall cease to have effect from the 1st day of June, 2011.]"
It is further seen that in section 115O of the Act w.e.f. 01.04.2018, the proviso is inserted in sub-clause (1) wherein the differential rate of tax of 30% was provided for the dividend referred to clause (2) of sub-section (2) of section 22 of the Act. Thus, it could be presumed that prior to the insertion of this proviso, the dividend as referred to sub-clause (1) of section 115O includes deemed dividend u/s 2(22)(e) of the Act for which the tax rate was of 15%. If the company who is paying the dividend has failed to pay the dividend distribution tax, the Principal Officer of the company is deemed to be in default as provided in section 115Q of the Act. In the instant case, it is the arguments of Ld. AR that as per 115O(3) in the event, it is held that the loan/advance received by M/s. HBN Homes Colonizers Pvt. Ltd. from M/s HBN Dairies & Allied Ltd. is deemed dividend in the hands of the assessee, it is incumbent upon the Principal Officer of M/s HBN Dairies & Allied Ltd. for payment of tax u/s 115O of the Act. If it is not done by the company, M/s. HBN Homes Colonizers Pvt. Ltd., its Principal Officer could be held as officer in default as provided in section 115Q of the Act. However, the status of the assessee for claiming exemption u/s 10(34) of the Act could not be denied solely for the reason that no tax was paid in terms of section 115O of the Act which is the sole responsibility of the company and assessee is not be responsible for such default. Therefore, the assessee is eligible for exemption u/s 10(34) on the amount of deemed dividend held as income in his hands u/s 2(22)(e) of the Act. Hon’ble Madras High Court in the case of R. Chitra (supra) has dealt with this issue and held that the said dividend is not taxable in terms of section 10(34) of the Act. The relevant findings as contained in para 41 to 43 of the said order are as under:-
"41. The Bombay High Court, in a decision in the case of Pr. CIT v. Smt. Kayan Jamshid Pandole [2018] 100 taxmann.com 284/[2019] 260 Taxman 32 had held as follows: "2. Following questions are presented for our consideration: "(a) Whether on the facts and in the circumstances of the case and in law, the Hon'ble Income-tax Appellate Tribunal was justified in holding that the amount of Rs. 2,78,46,000/- received by the assessee from Spirax Marshall (P) Ltd on sale of its shares to the said company under the Scheme of Arrangement, which is treated as deemed dividend under section 2(22)(d) of the Act, is exempt under section 10(34) of the Act? (b) Whether on the facts and in the circumstances of the case and in law, in this peculiar case, the assessee can claim exemption under section 10(34) of the Act when the company Priya Soparkar 27 itxa 387-16-0 M/s Spirax Marshall (P) Ltd has not paid additional income-tax under section 115-0 of the Act?"
On the other hand, learned counsel Mr. Porus Kaka appearing for the assessee submitted that the income generated by way of buy back of shares by the company was in the nature of capital gain. Assessee had offered the same to tax accordingly. If the Revenue contends that the income is in the nature of deemed dividend, the effect of section 10(34) of the Act would automatically follow. He further submitted that all other assessees who were shareholders of the same company and who formed a common group had made declaration in the income tax returns declaring the gain as a capital gain. The Revenue has not opposed these claims in their cases. The Revenue has isolated the cases of only two assessees for a differential treatment. He 1 (2018) 400 ITR 1 (SC) Priya Soparkar 57 itxa 387-16-o further pointed out that case of Kamal Imran Panju also arose out of the same arrangement. In said case, the revenue chose not to pursue the issue beyond the level of the Tribunal. On the question of consistency, therefore, he argued that the revenue would be precluded from pursuing the present appeal. 8. Section 2(22) of the Act as is well known includes range of situations under which payment by company to its shareholders would amount to distribution of dividend. Clause (d) of Section 2(22) provides that any distribution to its Priya Soparkar 67 itxa 387-16-o shareholders by the company on reduction of capital to the extent to which the company possesses the accumulated profit which arose after end of previous year, under certain circumstances would be included in the term "dividend". 9. Section 10(34) in turn exempts from payment of tax, any income by way of dividend referred to section 115-0. As per sub-section (1) of section 115- O notwithstanding anything contained in the provisions of Act and subject to the provisions of the said section in addition to the income tax chargeable in respect of the total income of the domestic company, any amount declared, distributed or paid by such company by way of dividend on or after 1st April, 2003 would be chargeable to additional income tax referred to as tax on distributed profits. 10. The question would be whether the deemed dividend under section 2(22)(d) would fall within the purview of sub-section 1 of section 115-0 of the Act. However, the legislature has advisedly cleared this position by providing an explanation to section 115-Q of the Act. Before we refer to the explanation, Priya Soparkar 77 itxa 387-16-o we may note that section 115-Q provides that if any Principal Officer of domestic company and a company does not pay tax on distributed profits in accordance with the provisions of section 115-0 then he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of the Act for collection and recovery of the income tax shall apply. This provision thus makes a specific reference to unpaid distribution tax by a company. An explanation to section 115-Q which existed at the relevant time but which was omitted by the Finance Act, 2018 and provided that for the purposes of the said Chapter (Chapter XIID) which contains section 115-0 and 115-Q, the expression "dividend" shall have the same meaning as it given to dividend under sub-section (22) of section 2, but shall not include sub-clause (e) thereof.
The plain effect of the explanation, therefore, would be that even the deemed dividend under section 2(22)(d) of the Act would be covered from the purpose of Chapter XIID. In turn, therefore, such deemed dividend would be one which is referred to Section 115-0 of the Act. Inescapable conclusion, therefore, Priya Soparkar 87 itxa 387-16-o would be that such dividend also would be exempt from tax in the hands of the receiver in terms of section 10(34) of the Act.
The contention of the counsel for the Revenue that the company having not paid such dividend distribution tax, exemption under section 10(34) should be deprived to the assessee needs to be noted only for rejection. If a certain income is exempt at the hands of receiptant by virtue of statutory provision, unless a provision is made in the statute itself, such exemption cannot be withdrawn only because the payer has not paid tax. The statute has made specific provision for recovery or unpaid tax from the company. In the result, the tax appeal is dismissed." In the aforesaid observations, the Bombay High Court has emphatically held that if certain income is exempted in the hands of the recipient by virtue of statutory provisions, such an exemption cannot be withdrawn only because the payer has not paid the tax, unless such provisions are made in the statute itself.
In the light of the aforesaid decision, it can be held that the Settlement Commission ought to have passed orders only in accordance with the provisions of the Act and the contrary findings in the impugned order of the Commission, cannot be sustained. As such, the conclusion which this Court is able to arrive on this proposition is that "dividend is not taxable" as per the provisions of section 10 (34) of the Act and the contrary findings in the impugned order of the Settlement Commission is deemed to be violative of the statutory provisions and therefore illegal.
The learned Standing counsel for the Department submitted that the decision of the Bombay High Court in Kayan Jamshid Pandole (supra) is distinguishable on facts. I am unable to endorse such a submission. A plain reading of paragraphs 8 to 11 of the said decision reveals that the High Court had laid down the proposition of law that dividend referred therein, is not taxable, without reference to the facts of that case. Hence it cannot be said that the findings therein could to be distinguished, by applying the facts of that case."
With regard to the reliance placed by Ld. CIT DR on the judgement of Hon’ble Kerala High Court in the case of Dr.T.J.Jaikish P.V.S. Hospitals (P.) Ltd. vs CIT, Kozhikode [2018] 92 taxmann.com 351 (Kerala) wherein the Hon’ble High Court held that “benefit of section 10(34) would be available only for the amount which has suffered tax u/s 115O of the Act and since any case of deemed dividend, there is no payment of additional tax u/s 115O, same is not exempted”. It is seen that the judgement of Hon’ble Kerala High Court is prior to the judgement of Hon’ble Madras High Court in the case of R. Chitra (supra) wherein the hon’ble Madras High Court has held that deemed dividend is exempted u/s 10(34) of the Act.
It is settled proposition of law that where on any issue, two views are available of different High Courts and no judgement is available of Hon’ble Supreme Court, under such circumstances, the view favorable to the assessee should be taken as has been held by the Hon’ble Apex Court in the case of The Commissioner Of Income-Tax vs M/S. Vegetables Products Ltd [1973] 88 ITR 192 (SC). Iin view of above, discussion and by respectfully following the judgement of hon’ble Madras high court in case of R. Chitra (supra). favoring the assessee, we hold that the deemed dividend of INR 28,14,70,430/- treated as deemed dividend u/s 2(22)(e) of the Act is eligible for exemption u/s 10(34) of the Act. Accordingly, we direct the AO to delete the addition made on this account. Grounds of appeal taken by the assessee are accordingly, allowed.
In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on 14.08.2025.