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आदेश/Order
PER N.K. SAINI, VICE PRESIDENT
This is an appeal by the Assessee against the order dt. 20/02/2019 of Ld. CIT(A)-1, Chandigarh.
Following grounds have been raised in this appeal:
That on the facts, circumstances and legal position of the case, the Worthy CIT(A) in Appeal No. 10646/17-18 dated 20.02.2019 has erred in passing that order in contravention of the provisions of S.250(6) of the Income Tax Act, 1961. 2. That on law, facts and circumstances of the case, Worthy CIT(A) has erred in confirming the action of Ld. AO of making addition of Rs. 26,926/- u / s 36(1)(iii) by disallowing proportionate interest in respect of interest free advance given for business purpose to M/ s Temptation Foods even when the owned interest free funds far exceeded the advance in question.
That on law, facts and circumstances of the case, Worthy CIT(A) has erred in confirming the action of Ld. AO of making an addition of Rs. 11,00,000/- u / s 2(22)(e) even when the appellant company is not a shareholder of Punjab Metallics Ltd. from the relevant amount was received and more-so when the relevant transactions inter-se the parties does not amount to "advance" as contemplated u / s 2(22)(e).
That the appellant craves leave for any addition, deletion or amendment in the grounds of appeal on or before the disposal of the same.
Ground No. 1 & 4 are general in nature and Ground No. 2 was not pressed, so these grounds do not require any comment on our part.
Vide Ground No. 3 the grievance of the assessee relates to the sustenance of addition of Rs. 11,00,000/- made by the A.O. by invoking the provisions of Section 2(22)(e) of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’) on account of deemed dividend.
Facts of the case in brief are that the assessee filed its return of income on 27/10/2015 declaring an income of Rs. 68,31,620/- which was processed under section 143(1) of the Act, later on the case was selected for scrutiny.
During the course of assessment proceedings the A.O. noticed that the assessee had received unsecured loans from M/s Punjab Metallic Pvt. Ltd. and found that Shri Sukhinder Singh Managing Director of the assessee company was holding 72.26% of share and he was also holding 45.39% of shares in M/s Punjab Metallic Pvt. Ltd. The A.O. made the impugned addition by observing in para 4.12 to 4.15 of the assessment order dt. 15/12/2016 as under:
4.12 From the shareholding pattern of M/S Punjab Metallic Pvt. Ltd. it is very clear that Sh. Sukhinder Singh Managing Director of the assessee company is holding 72.26% of shares in the assessee company and also holding 45.39% of shares in M/s Punjab Metallic Pvt. Ltd. Also as per the Balance sheet of the company, M/S Punjab Metallic Pvt. Ltd has not declared any dividend during the year. Therefore, it can be concluded that the case of the assessee company falls within the objectives behind the section 2(22)(e) and therefore, the amount of loan Rs. 11,00,000/- received by the assessee company from M/S Punjab Metallic Pvt. Ltd is liable to be added to the income of the assessee as deemed dividend u/s 2(22)(e).
4.13 It is pertinent to mention here that this dividend income in the hands of the assessee company is not exempt u/s 10(34) of the I.T. Act, 1961, simply because only those dividend which are referred to in section 1150 are exempt u/s 10(34). Deemed dividend u/s 2(22)(e) is not a dividend declared by the domestic company u/s 1150 of the I.T. Act. 4.14 Thus the facts of the case are as follows: 1. The assessee company has received loan of Rs.l 1,00,000/- during the year from a company i.e. M/S Punjab Metallic Pvt. Ltd in which public is not substantially interested. 2. Sh. Sukhinder Singh Managing Director of the assessee company is holding 72.26% of shares in the assessee company and also holding 45.39% of shares in M/s Punjab Metallic Pvt. Ltd. Thus the clause of substantial interest is satisfied. 3. Lending of money is not a substantial part of the business of the Company M/S Punjab Metallic Pvt. Ltd. 4. The company M/S Punjab Metallic Pvt. Ltd is holding enough accumulated profits to cover the loan given to the assessee company. 5. The company M/S Punjab Metallic Pvt. Ltd has not declared dividend during the financial year 2012-13. 4.15 On the basis of the discussion held above, the amount of Rs.l1,00,000/- which is received by the assessee company as loan is treated as deemed dividend u/s 2(22)(e) of the Act in the hands of the assessee company and the amount is added to the income of the assessee company. I am satisfied that the case of the assessee is fit for initiating penalty u/s 271 (1)(c) for furnishing inaccurate particulars of income.
Being aggrieved the assessee carried the matter to the Ld. CIT(A) and submitted as under:
"Facts & Submissions on this Ground: 1. As regards the applicability of provisions of deemed dividend u/s 2(22)(e) of the Act in respect of amount received in assessee company from Punjab Metalics, It is submitted that the assessee company is not a shareholder of Punjab Metallics.Therefore, the advance in question cannot be held as taxable deemed dividend u/s 2(22)(e) of the Act in the hands of recipient company, who is not a shareholder of the payer company. For this proposition, we rely upon the following ratio of judgment in the following cases:
CIT vs. Sharman Woolen Mills Ltd.(2012) 204 Taxman 82 (P&H HC)... 2. CIT vs. Ankitech Pvt. Ltd.(2012) 340ITR 14 (Del. HC)... 3. CIT vs. G.T.Z. Securities Ltd. (2012) 359 ITR 345 (J & K. HC)... 4. CIT vs. Sarva Equity Pvt. Ltd. (2012) 225 Taxman 172 (Kar. HC)... 5. CIT vs.lmpact Containers Pvt. Ltd. 367 ITR 346 (Bom. HC) 2014...
It is further submitted that the opening balance of all ledger account of the Punjab Metallics in the books of account was Rs.7,23,683/- and closing Balance was Rs.27,53,270/-. On 13.08.2013, the credit balance exceeded the opening
balance by peak amount of Rs 2,72,902/-. The acceptances during the year cannot be said to amount to deemed dividend u/s 2(22)(e). It is further submitted that the accumulated profits as per books of Punjab Metallics on 01.04.2013 was Rs. 18,65,641/- to 31.03.2014 was Rs. 13,52,636/-. Therefore, the accumulated profits of the payer company have reduced during the year. The preceding years' accumulated profits have already been considered for taxation of deemed dividend in the preceding year. Hence, the payment during the year have not been made by the payer company out of accumulated profits but have been paid out of other funds as the payer company suffered loss during the year. It is a settled Jaw that deemed dividend cannot exceed accumulated profits.
In view of above facts, circumstances, legal position and submission, it is prayed that this ground of the appellant may kindly be allowed, the impugned assessment may please be quashed and the additions made may please be ordered to be deleted."
The Ld. CIT(A) however did not find merit in the submissions of the assessee and sustained the addition by observing in para 7.2.3 of the impugned order as under:
7.2.3 The facts of the present case are that the assessee company has received loan of Rs.11,00,000/- during the year from a company i.e M/s Punjab Metallic Pvt. Ltd. in which public is not substantially interested. Sh. Sukhinder Singh Managing Director of the assessee company is holding 72.26% of shares in the assessee company and also holding 45.39% of shares in M/s Punjab Metallic Pvt. Ltd. Thus the clause of substantial interest is satisfied. Lending of money is not a substantial part of the business of the Company M/S Punjab Metallic Pvt. Ltd. The company M/S Punjab Metallic Pvt. Ltd is holding enough accumulated profits to cover the loan given to the assessee company! A perusal of the balance sheet of M/S Punjab Metallic Pvt. Ltd for A.Y.2014-15 reveals that there is 'Reserve and Surplus' of Rs. 1,28,62,690/- as on 01.04.2013 and Rs. 1,21,21,625/- as on 31.03.2014. The company M/S Punjab Metallic Pvt. Ltd has not declared dividend during the financial year. From the shareholding pattern of M/S Punjab Metallic Pvt. Ltd. It is apparent that Sh. Sukhinder Singh Managing Director of the assessee company is holding 72.26% of shares in the assessee company and also holding 45.39% of shares in M/s Punjab Metallic Pvt. Ltd. Therefore, AO has rightly concluded that the case of the assessee company falls within ambit of section 2(22)(e) of the Act. Addition made by the AO is confirmed. The case laws relied by the assessee company do not help him as the facts are distinguishable. The Ground of Appeal No.3 is dismissed. 9. Now the assessee is in appeal.
Ld. Counsel for the Assessee reiterated the submissions made before the authorities below and further submitted that the assessee company is not a shareholder of M/s Punjab Metallic Pvt. Ltd. from whom the loan of Rs. 11,00,000/- was received. Therefore deeming provisions of Section 2(22)(e) of the Act were not applicable, as such the addition made by the A.O. and sustained by the Ld. CIT(A) was not justified. Reliance was placed on the following case laws:
CIT vs. Sharman Woolen Mills Ltd.(2012) 204 Taxman 82 (P&H). 2. CIT vs. Ankitech Pvt. Ltd.(2012) 340ITR 14 (Del.) 3. CIT vs. G.T.Z. Securities Ltd. (2012) 359 ITR 345 (J & K)... 4. CIT vs. Sarva Equity Pvt. Ltd. (2012) 225 Taxman 172 (Kar)... 5. CIT vs.lmpact Containers Pvt. Ltd. (2014) 367 ITR 346 (Bom)
In his rival submissions the Ld. DR strongly supported the impugned order passed by the Ld. CIT(A) and reiterated the observations made in para 7.2.3 of the said order.
We have considered the submissions of both the parties and perused the material available on the record. In the present case it is an admitted fact that M/s Punjab Metallic Pvt. Ltd. is not a share holder of the assessee company from whom the loan was received by the assessee. Therefore the amount of loan cannot be treated as a deem dividend under section 2(22)(e) of the Act, in the hands of the assessee company as per the ratio laid down by the Hon'ble Jurisdictional High Court in the case of CIT Vs. Sharman Woolen Mills Ltd. (2011) reported at 79 CCH 709 wherein their Lordship observed in para 3 to 6 as under:
“3. Learned Tribunal has found that in terms of s. 2(22)(e) of the Act, the dividend income is assessable only in the hands of shareholders of the lending company. It has been found that assessee is not a shareholder of M/s Ankur Agro (P) Ltd. Thus, the said amount cannot be assessed in the hands of the assessee in terms of s. 2(22)(e) of the Act.
Learned counsel for the appellant has vehemently argued that the shareholders of the lending company and that of the assessee are the same.
Therefore, the unsecured loan advanced by the lending company to the assessee is in fact the loan to its shareholders.
We do not find any merit in the said argument. 6. Even if the shareholders are common of two companies but the fact remains that the assessee is a Separate juristic entity. The assessee is assessed to income-tax separately than its shareholders. The |oan has been advanced to a company who is not a shareholder of M/s Ankur Agro (P) Ltd.”
So respectfully following the ratio laid down by the Hon'ble Jurisdictional High Court, the impugned addition made by the A.O. and sustained by the Ld. CIT(A) is deleted.
In the result, appeal of the assessee is allowed.
(Order pronounced in the open Court on 11/12/2019)
Sd/- Sd/- संजय गग� एन.के.सैनी, (SANJAY GARG ) ( N.K. SAINI) �या�यक सद�य/ Judicial Member उपा�य� / VICE PRESIDENT AG Date: 11/12/2019
आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to :
अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File
आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar