THE DY. CIT 4(1), INDORE vs. M/S. RYDER TRANS INTERNATIONAL (P) LTD., INDORE

PER MANISH BORAD, A.M

The above captioned appeal filed at the instance of the

Revenue for Assessment Year 2012-13 is directed against the order

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

of Ld. Commissioner of Income Tax(Appeals)-II (in short ‘Ld. CIT],

Indore dated 29.03.2019 which is arising out of the order u/s

147/143(3) of the Income Tax Act 1961(In short the ‘Act’) dated

19.12.2017 framed by ACIT-4(1), Indore.

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

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

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 assessee company. Based

on this undisputed facts Ld. A.O invoked provision of Section

2(22)(e) of the Act and after considering the submissions made by

the assessee made the addition for deemed dividend u/s 2(22)(e) of

the Act at Rs.2,20,87,842/- and assessed the income u/s 147/r.w.s

143(3) of the Act at Rs.1,11,99,593/- (after giving set off of amount

accumulated loss of previous years).

succeeded. He allowed the appeal on the basis of settled judicial

precedents and deleted the addition observing that since the

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

assessee company is neither a registered nor a beneficial owner of

shares of the lender companies. The provisions of deemed dividend

u/s 2(22)(e) of the Act are not attracted.

detailed finding of Ld. A.O also submitted that the issue raised in

this appeal is squarely covered in favour of the revenue by the

judgment of Hon'ble Supreme Court of India in the case of National

Travel Services V/s CIT, Delhi (2018) 89 taxmann.com 332 (SC) order

dated 18.1.2018. Ld. Sr. DR has also submitted that the Hon'ble

Apex Court has also considered the judgment of Hon'ble High

Court of Delhi in the case of Ankitech’s (P) Ltd ITA 462/2009.

that no addition in the hands of assessee company is called for

since it is not the share holder of lender companies. Healso made

following written submissions:-

Regarding deemed dividend u/s 2(22)(e) 1. Ld. A.O added deemed dividend from three companies:- Sr. Name of Common Loan given Accumulated Amount No Company shareholding during the profit of added year (Rs.) lender company 4

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

1 Rajkamal Our share 86,95,000 on 6,06,91,862 86,95,000 Builders P Ltd. holders hold which repaid (RBPL) 100%in Rs.30,75,000 RBPL 2 Vimal Sneh Pvt Our share 1,00,00,000 93,55,409 1,00,00,000 Ld (VSPL) holders hold 36.85% in VSPL 3 Jain Our share 33,92,842 39,24,025 33,92,842 Transmission holders hold (I) Pvt Ltd 76.4% in (JTIPL) JTIPL 2,20,87,842

2.It is uncontroverted fact that assessee company is not shareholder of the lender companies. 3.It is 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. PB Ref. Citation Gist of the case No. 1 PB 144- CIT Vs Venkatesh Keeping in view the reasons as 145 Breverages (ITA 24 indicated herein above, we are also of 2012) (M.P. satisfied that for attracting the High Court) 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 was received. 2 PB-112- ACIT vs Gulmohar ..for bringing an assessee within the 118 Traders 29 ITJ purview of section 2(22)(e), both the 5

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

302 (Trib. Indore) conditions regarding assessee being registered as well as benefincial shareholder of the lender company are required to be established in the present case, the assessee is neither a registered nor a beneficial shareholder of the lender company. Reliance was placed on the judgments as under: (a)ACIT vs Bhoumik Colour Pvt. Ltd 118 ITD 1 (Mum.)(SB) (b)CIT vs C.P. Sarathy Mudaliar 83 ITR 170 (SC) (c) Rameshwarlal Sanwarmal 122 ITR 162 (SC) (d) JCIT vs Kunal Organics P Ltd 164 Taxman 169 (Ahd.) 3 PB 119- CIT vs Ankitech P Whether legal fiction created u/s 139 Ltd 11 taxmann 2(22)(e) enlarges definition of 100 (Del.) dividend only, legal fiction is not to be extended further for broadening concept of shareholders – Held, yes. Whether any company is supposed to distribute profits in form of dividend to its shareholders/ members and such dividend cannot be given to non-members- Held, yes. 4 PB 140- CIT vs Hotel Where assessee firm had received an 143 Hilltop 18 advance from a company and it was taxmann.com 308 assessee’s partners who were share (Raj.) holders in said company and not assessee-firm, such an advance could not be taxed as deemed dividend in hands of assessee-firm. 5 CIT Vs Daisy Where assessee-company had Packers P Ltd 220 received a deposit from a company Taxman 331 (Guj.) but did not own any share of that company it could not be treated as deemed dividend u/s 2(22)(e). 6 CIT vs Suram Where assessee company received Holding P Ltd 220 share application money from Taxman 327 (Raj.) another company, the amount in question could not be taxed as deemed dividend in its hands as the 6

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

assessee was not a registered share holder of said company.

placed before us and carefully gone through the judgments referred

and relied by the Ld. Counsel for the assessee as well as Ld. CIT(A).

Keeping the facts straight we find that Mr. Punyapal Surana is a

substantial shareholder having following share holding in the

concerns connected to the instant appeals:-

S.No. Name of company Share holding in percentage 1 Ryder Trans International Pvt. Ltd 25.35% (Assessee) 2 Vimal Sneh Pvt. Ltd 26.32% 3 Jain Transmission (I) Pvt. Ltd 39.87% 4 Rajkamal Builders 36.90%

companies (details also included accumulated profits of lender

companies);

S.No. Name of Company Loan Accumulated Amount Received profit added u/s 2(22)(e) 1 Vimal Sneh Pvt. 1,00,00,000 93,55,409 1,00,00,000 Ltd 7

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

2 Jain Transmission 33,92,842 39,24,025 33,92,842 (I) Pvt. Ltd 3 Rajkamal Builders 86,95,000 6,06,91,862 86,95,000 2,20,87,842

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 company.

in making the addition in the hands of the assessee company which

in its individual capacity is not the share holder in the above stated

three lender companies but there is a common shareholder having

substantial share holding in all the four companies”.

Provisions of Section 2(22)(e) of the Act reads as follows :-

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

(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 the beneficial owner 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 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 company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ; (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-clause (e), to the extent to which it is so set off; (iv) any payment made by a company on purchase of its own shares from a shareholder 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 9

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

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 which such acquisition took place. Explanation 2A.—In the case of an amalgamated company, the accumulated profits, whether capitalised or not, or loss, as the case may be, shall be increased by the accumulated profits, whether capitalised or not, of the amalgamating company on the date of amalgamation. 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 ;

exclusions provided therein, we observe that there are three limbs

in the operating part of Section 2(22)(e) of the Act and if the case of

the assessee falls in any one of the limb this provision is invoked.

Assessee has immunity if the case false under any of the exclusions

provided in (i) to (iv) of Section 2(22)(e).

under any of the exclusions. So for adjudicating the issue in hand

we need to confine our adjudication to examine that whether the

case of the assessee falls under any of the 3 limbs provided u/s

2(22)(e) of the Act. 10

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

owner 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 any concern in which such shareholder is a

member or a partner and in which he has a

substantial interest hereafter in this case referred to as

the said concern)

Third Limb (c ) or any payment by any such company on behalf of

or for the individual benefit, of any such shareholder,

to the extent to which the company is either case

possesses accumulated profits.

limb is not applicable since it is applicable to the amount received

by the share holder which is not the case before us. Third limb is

also not applicable since revenue has not made a case that the

alleged payments have been made for the individual benefit of the 11

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

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.

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 benefit of the shareholder. However

the ratio laid down by the Hon'ble Court has bearing on the issue

raised in the instant appeal before us.

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

The relevant portion of the judgment of Hon'ble Apex Court in the

case of National Travel Services V/s CIT is extracted below:-

9) A cursory look at the aforesaid definition would go to show that the shareholder referred to in the aforesaid provision would continue to be a shareholder who is on the register of members of the Company with one additional feature, namely, that such shareholder should be a person who has a substantial interest in the Company. Admittedly, the aforesaid additional feature would make no difference to the position of law laid down in the aforesaid two decisions.

10) In 1988, however, this definition was amended to read as follows:-

“Section 2. Definition – In this Act, unless the context otherwise requires,- (22) “dividend” includes-

(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 the beneficial owner 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, 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'” Explanation 2. - the expression “accumulated profits”, in sub-clauses (a), (b), (d) and (e),

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

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 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 14

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

shareholders having substantial interest are those who have a shareholding carrying not less than 20 per cent voting power as per the provisions of clause (32) of Section 2. The amendment of the definition extends its application to payments made (i) to a shareholder holding not less than 10 per cent of the voting power, or (ii) to a concern in which the shareholder has substantial interest. “Concern” as per the newly inserted Explanation 3 (a) to Section 2 (22) means a HUF or a firm or an association of persons or a body of individuals or a company. A shareholder having a substantial interest in a concern as per part (b) of Explanation 3 is deemed to be one who is beneficially entitled to not less than 20 per cent of the income of such concern.

10.3 The new provisions would, therefore, be applicable in a case where a shareholder has 10 per cent or more of the equity capital. Further, deemed dividend would be 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 where advances or loans have already been given, the new provisions have been made applicable only in cases where loans or advances are given after 31st May, 1987.” These amendments will apply in relation to assessment year 1988-89 and subsequent years.” 15

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

12) A reading of the amended definition would indicate that, after 31.05.1987, a “shareholder” is now a person who is the beneficial owner of shares holding not less than 10% of the voting power of the Company. Also, a new category has been added to the definition by introducing concerns in which such shareholder is a member or partner and in which he has a substantial interest. Explanation (3) of the amended provision states that “concern” means Hindu Undivided Family, firm, association of persons, body of individuals, or a Company and further goes on to state that 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 20% of the income of such concern.

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.

Punyapal Surana is a substantial shareholder in all the four

companies which includes three lender companies and one receiver

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

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 deemed to have

substantially interest in the concern other than company if he is,

at any time during the previous year is beneficially entitled to not

less than 20% of the income of such concern. In case the concern

is a company the person is deemed to have substantial interest if

holding not less than 10% of the voting power in the company. The

facts of the instant case clearly spells out that the assessee case

falls under the second limb of Section 2(22)(e) of the Act as there is

a common shareholders amongst all the four companies having

substantial interest and voting power of more than 10%. In the

three lender companies Shri Punyapal Surana is having share

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

holding at 23.36%, 39.87% and 36.90% as mentioned in Para 7 of

this order. The concern referred in Second limb of Section 2(22)(e)

of the Act, in this case is the assessee company where Shri

Punyapal Surana is having share holding of 23.36% . Since all the

conditions necessary for treating the deemed dividend of the

amount received in the hands of concern (which in this case is the

assessee) from other companies (three lender companies) stands

fulfilled, in our considered view Ld. A.O has rightly invoked the

provisions of Section 2(22)(e) of the Act and made addition for

deemed dividend. However the addition for deemed dividend should

have been made at Rs.2,19,74,818/- as against the addition of

Rs.2,20, 87,842/- made by the Ld. A.O as the addition for deemed

dividend cannot exceed the accumulated profits of the lender

company as appearing in the books before giving such loan and

advance. We thus set aside the finding of Ld. CIT(A), confirm the

addition u/s 2(22)(e) of the Act at Rs.2,19,74,818/- and partly allow

Revenue’s Appeal Ground No.1.

M/s Ryder Trans International Pvt.Ltd ITA No.720/Ind/2019

adjudication.

The order pronounced as per Rule 34 of ITAT Rules, 1963 on 30.04.2021.

Sd/- Sd/-

(MADHUMITA ROY) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER

�दनांक /Dated : 30th April, 2021 /Dev

Copy to: The Appellant/Respondent/CIT concerned/CIT(A) concerned/ DR, ITAT, Indore/Guard file. By Order, Asstt.Registrar, I.T.A.T., Indore