DCIT, CIRCLE-16(2), HYDERABAD, HYDERABAD vs. MARGADARSI MARKETING PRIVATE LIMITED, HYD, HYDERABAD

Briefly the facts of the case are, assessee company is engaged in the business of marketing of magazines, textiles and handicrafts. For the AY 2011-12, it files its return of income on 30/09/2011 admitting income of Rs. Nil. Subsequently, the case was selected for scrutiny under CASS and notices u/s 143(2) and 142(1) were issued and served on the assessee. In response to the notices, the AR of the assessee appeared and produced the details/information called for.

Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A) and the CIT(A) following the decision of the ITAT, Hyderabad in assessee’s own case for AY 2010- 11 in ITA No. 282/Hyd/2014, order dated 13/06/2014, deleted the addition made by the AO u/s 2(22)(e) of the Act.

Aggrieved by the order of the CIT(A), the revenue is in appeal before us raising the following grounds of appeal:

On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the advances received by the assessee company, not being a share holder of M/s Ushodaya Enterprises Pvt. Ltd. cannot be considered as deemed dividend as per the provisions of Sec. 2(22)(e), without appreciating that the share holders of the assessee-company are having substantial interest in M/s Ushodaya Enterprises Pvt. Ltd.

The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.

The appellant craves leave to amend or alter any grounds or add a new ground, which may be necessary.”

Considered the rival submissions and perused the material on record. We find that the issue in dispute is squarely covered by the decision of the coordinate benches of Hyderabad in assessee’s own case for earlier years. In AY 2010-11, the coordinate bench following its decision in assessee’s own case for earlier AYs 2005-06 to 2008-09 & 2009-10 upheld the order of the CIT(A) in deleting the addition made by the AO towards deemed dividend u/s 2(22)(e) by observing as under:

It is rightly pointed out by the Bombay High Court in Universal Medicare (P) Ltd.(supra)that Section 2(22)(e) of the Act is not artistically worded. Be as it may, we may reiterate that as per this provision, the following conditions are to be satisfied:

The intention behind enacting provisions of Section 2(22)(e) is that closely held companies (i.e. companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions, such payment by the company is treated as dividend. The intention behind the provisions of Section 2(22)(e) of the Act is to tax dividend in the hands of shareholders. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance.

Further, it is an admitted case that under normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under Section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to ‘dividend’. Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to ‘shareholder’. When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under Section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the

In a case like this, the recipient would be a shareholder by way of deeming provision. It is not correct on the part of the Revenue to argue that if this position is taken, then the income “is not taxed at the hands of the recipient”. Such an argument based on the scheme of the Act as projected by the learned counsels for the Revenue on the basis of Sections 4, 5, 8, 14 and 56 of the Act would be of no avail. Simple answer to this argument is that such loan or advance, in the first place, is not an income. Such a loan or advance has to be returned by the recipient to the company, which has given the loan or advance.

Precisely, for this very reason, the Courts have held that if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend under Section 2(22)(e) of the Act.

Insofar as reliance upon Circular No. 495 dated 22.09.1997 issued by Central Board of Direct Taxes is concerned, we are inclined to agree with the observations of the Mumbai Bench decision in Bhaumik Colour (P) Ltd. (supra)that such observations are not binding on the Courts. Once it is found that such loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not a shareholder, and that according to us is the correct legal position, such a circular would be of no avail.

No doubt, the legal fiction/deemed provision created by the Legislature has to be taken to ’magigical conclusion‘ as held in Andaleeb Sehgal (supra). The Revenue wants the deeming provision to be extended which is illogical and attempt is to create a real legal fiction, which is not created by the Legislature. We say at the cost of repetition that the definition of shareholder is not enlarged by any fiction.

The same view has also been expressed by the Hon’ble Delhi High Court again in case of CIT Vs. Navyug Promoters P. Ltd. (203 Taxman 618) and Hon’ble Bombay High Court in case of CIT Vs. Universal Medicare (P) Ltd., (324 ITR 263).

The ITAT, Hyderabad Bench in case of MARC Manufacturers Pvt. Ltd. Vs. ACIT in ITA No. 555/Hyd/2008 dt. 31/08/2009 while considering identical issue of advancement of loan to one company, which is not a shareholder of the lender company following the decision of ITAT Mumbai Special Bench in case of Bhaumik Colour P. Ltd. (supra) and other decisions held as under:

The intention of the legislature is clarified in circular issued by the CBIT as at the time of amendment of clause (e) of sub section (22) of sec. 2 is further fortified by the fact that for deduction of tax at source. Sec. 194 provide that such deduction of tax has to be made in the case of the payments of the nature mentioned in clauses (a), (b), (c), (d) and (e) of sub section (22) of Section 2 only in a case where such payments were made to a shareholder. Section 199 also indicates that adjustment of TOS would be provided in the assessment of shareholder only. The very fact that the provision for deduction of tax at source and adjustment of tax is only in respect of the payments to the' shareholder would clearly indicate that even after the amendment, the effect of clause (e) of sub section (22) of Sec. 2 would apply only when the payment is made to shareholder. Wherever, the tax is to be deducted at source from a dividend or deemed dividend and the consequential effect of giving effect to such deduction of tax at source, etc., reference was made only to the payments to the shareholder. This would indicate clearly that clause (e) would apply only in case of payments to the shareholder and not to others.”

Even otherwise also the amounts received by the assessee from M/s Ushodaya Enterprises P. Ltd. cannot be treated as deemed dividend under section 2(22)(e) of the Act. On a perusal of the order passed by the CIT(A) for the assessment year 2006-07, which is also in appeal before us, it is very much evident that the CIT(A) has elaborately and exhaustively dealt with the issue by examining all the relevant facts and materials and thereafter has come to the conclusion that the amounts received by the assessee from M/s Ushodaya Enterprises is in regular course of trade, hence, outside the purview of section 2(22)(e) of the Act. On the contrary, the Assessing Officer neither in course of the assessment proceeding nor in his remand report has brought any materials to establish the fact that the amount received was not in regular course of trade but in the nature of loan and advance as envisaged u/s 2(22)(e) of the Act. In aforesaid view of the matter, we find no reason to interfere with the order passed by the CIT(A) in all the assessment years under consideration and uphold the same. The grounds raised by the department being devoid of merit are therefore dismissed in all the appeals under consideration.

In the result, all the appeals filed by the Department are dismissed.”

Since the issue under consideration is materially identical to that of the case decided by the coordinate bench in assessee’s

In the result, appeal of the revenue is dismissed. Pronounced in the open court on 24th January, 2018.