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Facts
The assessee, a common shareholder in Hextech Engineers India Pvt. Ltd. and Zetex Engineers Pvt. Ltd., received a loan from Hextech to Zetex. The Assessing Officer treated this loan, to the extent of accumulated profits, as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
Held
The Tribunal held that the reopening of assessment was an independent decision of the AO and not based on a prior CIT(A) decision. It also upheld the addition of deemed dividend under Section 2(22)(e), finding that the transaction was not a business transaction and that the assessee was a substantial and beneficial shareholder.
Key Issues
Whether the loan advanced to a company by another company, where the assessee is a common substantial shareholder in both, can be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act. Whether the reassessment proceedings were validly initiated.
Sections Cited
147, 148, 2(22)(e), 234A, 234B, 234C, 143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
Before: SHRI MANISH BORAD & SHRI VINAY BHAMORE
ORDER PER VINAY BHAMORE, JM: These are recalled matter. Both the above captioned appeals filed by the assessee are directed against the separate orders dated 15.11.2016 and 04.07.2017 passed by Ld. CIT(A)-1, Nashik [‘Ld. CIT(A)’] for the assessment years 2008-09 and 2009-10 respectively. Since the Tribunal in its original order has already decided the additional ground & the matter was recalled only for & 2205/PUN/2017 deciding Ground Nos.1 to 6 raised in the memo of appeal, we are deciding the same in the subsequent paragraphs. 2. Since the identical facts and common issues are involved in both the above captioned appeals of the assessee, we proceed to dispose of the same by this common order. 3. First, we shall take up the appeal of the assessee in A.Y. 2008-09 : 4. The appellant has raised the following grounds of appeal :- “1] On the facts and in the circumstances of the case and in law that the re-assessment u/s 147 be held bad in law as reopening is based on the decision of CIT(A) in the case of Zetex Engineers Pvt. Ltd. and which is not accepted by the dept. 2] The learned CIT(A) erred in confirming the addition of Rs.1,00,28,347/- as deemed dividend in the hands of the appellant on the ground that Hextech Engineering Pvt. Ltd. (Hextech) had given a loan to Zetex Engineers Pvt. Ltd. (Zetex) and the appellant is a common shareholder in both the companies with more than 90% shareholding. 3] The learned CIT(A) was not justified in taxing the above amount of Rs.1,00,28,347/- as deemed dividend in the hands of the appellant as the funds given by Hextech to Zetex were for the purposes of its business and not as a loan and therefore, the question of taxing any deemed dividend on account of these transactions simply did not arise u/s 2(22)(e). 4] Without prejudice, the learned CIT(A) erred in sustaining the addition of Rs.1,00,28,347/ while it should have been restricted only to the peak amount arising out of the loans given during the F.Y. 2007-08 and not out of the transactions in the past years and secondly, it should have been restricted only to the incremental increase in accumulated profits after deducting the & 2205/PUN/2017 deemed dividend for the earlier years as per the provisions of the Act. 5] Without prejudice, the appellant submits that deemed dividend if any, could be taxed in his hands only in proportion of his shareholding to the total shareholding of Hextech of the accumulated profits of the company and not to the extent of the entire accumulated profits of the company. 6] The learned CIT(A) erred in confirming interest charged u/s 234A/234B/234C as charged by the A.O. 7] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal
.”
1. 5. Facts of the case, in brief, are that the assessee is an individual and derives salary income as Director in Hextech Engineers India Pvt. Ltd., Nashik. The return of income was filed on 30.09.2008 declaring total income of Rs.43,63,215/-. The case was reopened by issuing notice u/s 148 of the IT Act. The assessee is a shareholder director in M/s. Hextech Engineers India Pvt. Ltd. and holding 97.10% of the shares of the company and also shareholder in M/s. Zetex Engineers Private Ltd. holding 99.95% of the shares of the company. The Hextech Engineers India Pvt. Ltd. has given a loan of Rs.2,14,60,905/- to M/s. Zetex Engineers Pvt. Ltd. as Shri Ravi Pichaya is the common shareholder with more than 90% of shareholding in both the companies, hence the loan up to extent of accumulated profit of Rs.1,00,28,347/- taken by M/s. Zetex Engineers Pvt. Ltd. from M/s. Hextech Engineers India Pvt. Ltd. & 2205/PUN/2017 was considered as deemed dividend u/s 2(22)(e) of the IT Act and accordingly the AO made addition of Rs.1,00,28,347/- and assessed the income at Rs.1,43,91,560/-. 5.1 After considering the reply of the assessee, Ld. CIT(A) dismissed the appeal of the assessee by placing reliance on judgement passed by Hon’ble Bombay High Court in the case of Universal Medicare (2010) 190 Taxman.com 144 and also relied on judgement passed by Hon’ble Delhi High Court in the case of Ankitech (P) LTD 11 Taxman.com 100 (Delhi). It is this order against which the assessee is in appeal before this Tribunal. As we have already clarified earlier that this is a recalled matter and the appeal was recalled to decide only ground nos.1 to 6 raised in the memo of appeal. Accordingly, only above grounds are adjudicated.
6. With regard to ground no.1, Ld. AR appearing from the side of the assessee submitted before us that the order passed by Ld. CIT(A) is unjustified. It was further submitted that reopening was based on the decision of Ld. CIT(A) in the case of M/s. Zetex Engineers Private Ltd. which was not accepted by the Department. 6.1 With regard to the ground no.1, Ld. DR appearing from the side of the Revenue submitted before us that the order passed by Ld. & 2205/PUN/2017 CIT(A) is correct. It was submitted that the reopening in the case of the assessee is not based on the decision of Ld. CIT(A) in the case of M/s. Zetex Engineers Private Ltd. instead it was an independent decision made by the Assessing Officer on the basis of facts of the case of the assessee. 6.2 With regard to ground no.1, we have heard Ld. Counsels from both the sides and perused the material available on record. In this regard, we find that the Assessing Officer independently was of the view that the addition is required to be made in the hands of the assessee being a beneficial shareholder. The case of the assessee was not reopened on the basis of decision of M/s. Zetex Engineers Private Ltd. since the same is evident from the reasons for reopening. For ready reference the reasons for reopening are as follows :- “in case of M/s Zetex Engineers Pvt. Ltd. for A.Y. 2008-09 the assessee Shri Ravi Pichaya (PAN ACLP9236E) major shareholder in the company. He holds 99.95% share in the above mentioned company. During the year the Company M/s Zetex Engineers Pvt. Ltd has taken loan amounting to Rs.2,14,60,905/- from a company Hextech Engineers India Pvt. Ltd. which is a closely held company. Further, it is also found that the assessee Shri Ravi Pichaya has 97.10% of the share holding in M/s Hextech Engineers India Pvt. Ltd. Thus, the assessee is holding 99.95% share in M/s Zetex Engineers Pvt. Ltd. and is having 97.10% share in M/s Hextech Engineers India Pvt. Ltd.
The above mentioned loan of Rs.2,14,60,905/- is taken by the Company Zetex Engineers Pvt. Ltd. during the year from the & 2205/PUN/2017 another Company M/s Hextech Engineers India Pvt. Ltd. As Shri Revi Pichaya holds more than 20% shares in both the Companies. He becomes ultimate beneficiary and the loans are income of the assessee on account of deemed dividend wherein the purview of section 2(22)(e).
On verification of final accounts of M/s Hextech Engineers India Pvt. Ltd. is the accumulated profit is Rs. 37,22,723/- and the amount of loan given to M/s Zetex Engineers Pvt. Ltd. is at Rs. 2,14,60,905/-. Hence, accumulated profits of Rs. 37,22,723/- is to be considered as deemed dividend in purview of section 2(22)(e) of the Income Tax Act 1961. Shri Ravi Pichaya is a major Shareholder and income of Rs. 37,22,723/- is assessable in his hands under the head deemed dividend u/s 2(22)(e).
Thus the income of the assessee to the extent of Rs. 37,22.723/- has escaped assessment for the A.Y. 2008-09 within the meaning of section 147 of the Income Tax Act, 1961. A sum of Rs. 37,22,723 is taxable as deemed dividend u/s 2(22)(e) in the hands of the assessee being a substantial and beneficial shareholder.” 6.3 Accordingly, from the perusal of above reasons for reopening, we find that it was an independent decision and not based on the decision of Ld. CIT(A) in the case of M/s. Zetex Engineers Private Ltd. Accordingly, ground no.1 raised by the assessee is dismissed.
With regard to ground no.2, Ld. AR appearing from the side of the assessee submitted before us that the order passed by Ld. CIT(A) wherein he confirmed the addition of Rs.1,00,28,347/- as deemed dividend in the hands of the appellant on the ground that the appellant is a common shareholder in both the companies with more than 90% shareholding is not correct. Accordingly, Ld. AR requested to delete the addition.
& 2205/PUN/2017 7.1 With regard to ground no.2, Ld. DR appearing from the side of the Revenue submitted before us that the order passed by Ld. CIT(A) is reasoned one and same should be upheld and the appeal filed by the assessee may kindly be dismissed. 7.2 With regard to ground no.2, we have heard Ld. Counsels from both the sides and perused the material available on record. In this regard, we find that Ld. CIT(A) in his order in para 5.6.6 has specifically referred the judgement in the case of Universal Medicare Private Limited, 324 ITR 263 wherein it has been held by Hon’ble Bombay High Court that deemed dividend can by assessed only in the hands of the beneficial shareholders only. It was further observed by Ld. CIT(A) that M/s. Zetex Engineers Private Ltd. has taken a loan of Rs.2,14,60,905/- from M/s. Hextech Engineers India Pvt. Ltd. and Shri Ravi Pichaya is a common shareholder of 99.05% and 97.10% shares respectively in both the companies. Accordingly, in the light of CIT vs. Universal Medicare (P) Ltd., Hon’ble Bombay High Court order dated 22-03-2010 which was subsequently approved by Hon’ble Apex Court, in the case of CIT vs. Madhur Housing & Development Co. (2018) 93 taxmann.com 502 (SC), we find that there is no infirmity in the order passed by & 2205/PUN/2017 Ld. CIT(A). Therefore, ground no.2 raised by the assessee is dismissed.
With regard to ground no.3, Ld. AR appearing from the side of the assessee submitted before us that the order passed by Ld. CIT(A) is unjustified. It was further submitted by Ld. AR that the transaction was a business transaction. Therefore, the same was not required to be taxed as deemed dividend in the hands of the assessee. 8.1 With regard to ground no.3, Ld. DR appearing from the side of the Revenue submitted before us that the order passed by Ld. CIT(A) is reasoned one and justified. Accordingly, it was prayed that the ground no.3 raised by the assessee may kindly be dismissed. 8.2 With regard to ground no.3, we have heard Ld. Counsels from both the sides and perused the material available on record. In this regard, we find that Ld. CIT(A) has dismissed this ground by observing as under :- “5.14 Any advance or loan given including a running account can be treated as "Deemed Dividend" except in a case where loan/advance made to a shareholder or the said concern by a company in the course of business of money lending. The company is not a money lending company so such advance cannot be considered under exception provided under section 2(22)(e). The argument of ld. A.R. that loans and advances should be treated as normal business transactions cannot come to its rescue, in absence of any documentary & 2205/PUN/2017 evidence to corroborate or substantiate its view. I fail to understand the Commercial transaction embedded in this transaction of drawls of loans and advances by the appellant from the company. It is true that the word commercial transaction is not defined in Income Tax Act. The definition of commercial transaction as per business dictionary is An interaction between two or more parties in which goods, services or something of value is exchanged for some type of remuneration. In this particular transaction between appellant and company the element of commerce or profit or remuneration is absent. Hence the transaction be termed as commercial transaction as no monetary consideration for the appellant is involved in the same. Hence the argument of Ld. AR that this is commercial transaction stands dismissed. 5.15 Reference is invited to the decision of Hon'ble ITAT, Mumbai in the case of Smt Shantidevi Mahavir Prasad Gupta where the addition on deemed dividend under section 2(22)(e) has been upheld holding that the advance given by the appellant to the company are not in nature of loan nor any interest have been charged by the Company from the appellant. The Hon'ble Tribunal has upheld the levy of penalty under section 271(1)(c) on the addition of deemed dividend in its order Α.Υ. 2003-04 dated 05/02/2014. 5.16 The reliance of appellant in plethora of cases of jurisdictional High Court namely, Jignesh Shah, Impact Containers, Universal Medicare cannot come its rescue. In all these case the Hon'ble High Court has held that the deemed dividend can assessed only in the hands of shareholders only. In the instant case it is an established fact that M/s Zetex Engineers Pvt. Ltd. has taken a loan of ₹2,14,60,905/- from M/s Hextech Engineering (I) Pvt. Ltd. And Mr. Ravi Pichaya is the common shareholder holding 99.95% and 97.10% shares respectively and at the end of the year M/s Zetex Engineers Pvt. Ltd. has a debit balance of ₹2,14,60,905/- with M/s Hextech Engineering (I) Pvt. Ltd. The assessee has not been able to demonstrate through any cogent or credible evidence that this transaction that he had with the M/s Hextech Engineering Pvt. Ltd. was commercial in nature. The AO has rightly taxed the same as deemed dividend to the extent of accumulated profit of ₹ 1,00,28,347/- in the hands of Shri Ravi Pichaya. 5.17 In the facts and circumstances of the case and keeping in view of the above judicial decision of the Hon'ble Delhi High Court, I am of the opinion that the loan to the extent of accumulated profit of ₹1,00,28,347/- taken by M/s Zetex Engineers Pvt. Ltd. from M/s Hextech Engineering (I) Pvt. Ltd. in the A.Y. 2008-09 is liable to be taxed as deemed dividend as per the provision of section 2(22)(e) of the Income Tax Act, 1961 in the hands of the share holder i.e. the assessee Shri Ravi Pichaya".”
& 2205/PUN/2017 8.3 From perusal of the above finding of Ld. CIT(A) on this issue, we do not find any infirmity in the order of Ld. CIT(A). We further find that even before us nothing concrete or substantive evidence was produced in support of claim that it was a business transaction. It was the contention of Ld. AR that the transaction was a business transaction since the Tribunal in his earlier order dated 20.11.2013 passed in the case of M/s. Zetex Engineers Private Ltd. for assessment years 2008-09 and 2009-10 has confirmed the order passed by Ld. CIT(A) wherein he deleted the addition made u/s 2(22)(e) in the hands of M/s. Zetex Engineers Private Ltd. A perusal of the above referred order does not indicate that the Tribunal has given finding of fact that the impugned transaction was a business transaction. We also find that the Tribunal in the above order found that Ld. CIT(A) has relied on the orders passed by Special Bench in the case of ACIT vs. Bhaumik Colour Pvt. Ltd. (2009) 27 SOT (Mumbai) wherein it was held that deemed dividend can only be taxed in the hands of a person who is not only beneficial shareholder but also a registered shareholder. The above order in the case of Bhaumik Colour Pvt. Ltd. (supra) has been followed by Pune Bench in order dated 31.03.2009 in & 2205/PUN/2017 the case of M/s Shivananda Electronics vs. JCIT. Therefore, we are of the considered opinion that the addition was not deleted by treating the transaction as business transaction but was deleted on the basis of Bhaumik Colour Pvt. Ltd. (supra) and on the basis of reasoning that the deemed dividend can only be taxed in the hands of the beneficial and registered shareholders and obviously M/s. Zetex Engineers Private Ltd. was not a beneficial and registered shareholder & therefore the addition was deleted. Therefore, ground no.3 raised by the assessee is dismissed.
With regard to ground no.4, Ld. AR appearing from the side of the assessee submitted before us that the order passed by Ld. CIT(A) is unjustified. It was contended before the Bench that the addition should have been restricted only to the peak amount arising out of loans given during the financial year 2007-08 only. Therefore, it was requested to restrict the addition accordingly. 9.1 With regard to ground no.4, Ld. DR appearing from the side of the Revenue submitted before us that the order passed by Ld. CIT(A) is correct in this regard and ground no.4 raised by the assessee should be dismissed.
& 2205/PUN/2017 9.2 With regard to ground no.4, we have heard Ld. Counsels from both the sides and perused the material available on record. We find that M/s. Hextech Engineers India Pvt. Ltd. has given loan of Rs.2,14,60,905/- to M/s. Zetex Engineers Private Ltd. but the addition was restricted only to the extent of accumulated profits of Rs.1,00,28,347/- appearing in the books of accounts of M/s. Hextech Engineers India Pvt. Ltd. According to us, it is the requirements of section 2(22)(e) to tax the amount of accumulated profits available in the books of the company providing loan to other related company & in the instant case it is M/s. Hextech Engineers India Pvt. Ltd. And therefore the Assessing Officer has not made the addition of Rs.2,14,60,905/- but have made the addition only to the extent of available accumulated profits, and according to us the same is correct. Accordingly, ground no.4 raised by the assessee is dismissed.
With regard to ground no.5, Ld. AR appearing from the side of the assessee (without prejudice to the above grounds) submitted before us that the addition could be made in his hands only in proportion of his shareholding and not to the extent of the entire & 2205/PUN/2017 accumulated profits of the company. Accordingly, it was requested to delete the excess addition. 10.1 With regard to ground no.5, Ld. DR appearing from the side of the Revenue submitted before us that the order passed by Ld. CIT(A) is justified and requested to dismiss the ground raised
by the assessee in this regard. 10.2 With regard to ground no.5, we have heard Ld. Counsels from both the sides and perused the material available on record. In this regard, we find that the assessee is holding 97.1% of the shares of the company M/s. Hextech Engineers India Pvt. Ltd. and also holding 99.95% of shares of the company M/s. Zetex Engineers Private Ltd. We further find that the requirement of section 2(22)(e) is that the deemed dividend is to be added in the hands of the beneficial & registered shareholder only and since the assessee is holding 99.95% shares of M/s. Zetex Engineers Private Ltd., we do not find any error in the order passed by the Assessing Officer and confirmed by Ld. CIT(A). Accordingly, ground no.5 raised by the assessee is dismissed.
11. With regard to ground no.6, we find that the assessee has challenged the confirmations of interest u/s 234A, 234B and 234C & 2205/PUN/2017 as charged by the Assessing Officer. We find that the interest is consequential in nature and, therefore, there is no error in the order of Ld. CIT(A) wherein he confirmed the addition u/s 234A, 234B and 234C of the IT Act. Thus, ground no.6 raised by the assessee is dismissed.
Ground no.7 is general in nature and therefore needs no adjudication hence dismissed as such.
Apart from all the above grounds, it was also submitted before the Bench that in assessee’s own case for assessment year 2010-11, the Tribunal has already held that the reopening of assessment in the hands of assessee as on 04.09.2013 was not valid & therefore on the same reasoning the notices issued for asstt. year 2008-09 were also not valid hence prayed to cancel the proceedings u/s 148 for this year also.
In this regard, we find that the Coordinate Bench of Tribunal while deciding the case of assessee for assessment year 2010-11 observed as under :- “14. The reopening of assessment in the hands of assessee as on 04.09.2013 could not be upheld on the ground that provisions of section 2(22)(e) of the Act may eventually apply to the major shareholder vis-à-vis transaction between two companies in which the assessee is the major shareholder. Eventuality of application of section 2(22)(e) of the Act whether in the hands of Zetex or the assessee & 2205/PUN/2017 simultaneously cannot be taken up i.e. where the addition has already been made in the hands of Zetex by the Assessing Officer concerned and the said addition was challenged before various Forums simultaneously, re-assessment proceedings cannot be initiated in the hands of assessee being the major shareholder. In view of the facts and issue being decided by the Hon’ble Bombay High Court, we find no merit in initiation of re-assessment proceedings by recording reasons for reopening assessment in the hands of assessee as on 04.09.2013 i.e. the date on which the addition was already made in the hands of recipient of loan, though the assessee was major shareholder of the concern giving loan and concern taking the loan. Hence, the re- assessment order passed under section 143(3) r.w.s. 147 of the Act is annulled. The additional ground of appeal
raised by assessee is thus, allowed. Since the jurisdictional issue has been decided, we are not addressing other grounds of appeal raised by assessee.
15. In the result, the appeal of assessee is allowed.”
15. With regard to above order passed by the Tribunal for assessment year 2010-11 in the case of assessee itself we find that the notice u/s 148 was held to be invalid, since the Department was carrying simultaneous 148 proceedings in the case of M/s. Zetex Engineers Private Ltd. as well as in the case of assessee i.e. Ravi Pichaya on the basis of deemed dividend u/s 2(22)(e) of the IT Act. We further find that for assessment year 2010-11 the Department has already added deemed dividend in the hands of M/s. Zetex Engineers Private Ltd. and when Tribunal has deleted the above addition from the hands of M/s. Zetex Engineers Private Ltd. the order was challenged before Hon’ble Bombay High Court and simultaneously Department also started proceedings u/s 147/148 on & 2205/PUN/2017 the basis of same deemed dividend u/s 2(22)(e) of the IT Act in the hands of assessee, Ravi Pichaya. Accordingly, the Tribunal hold that the Department cannot initiate 147/148 proceedings in the case of two assessees on the same issue and therefore the notice u/s 148 was held to be invalid and appeal of the assessee was allowed for assessment year 2010-11.
16. Now coming to the instant case in hand i.e. assessment year 2008-09, we find that the notice u/s 148 was issued on 03.03.2015 and on that date the Department was not contesting the deletion of addition of deemed dividend u/s 2(22)(e) of the IT Act in the hands of M/s. Zetex Engineers Private Ltd. and the decision to issue notice u/s 148 to the assessee for assessment year 2008-09 was an independent proceeding. Accordingly, we find that the finding given by the Tribunal in the case of the assessee for assessment year 2010-11 is not applicable to the instant case i.e. for assessment years 2008-09 and 2009-10. Accordingly, the ground of applicability of decision of asstt. year 2010-11 to the instant case also fails. The appeal filed by the assessee is dismissed.
In the result, the appeal filed by the assessee in A.Y. 2008-09 is dismissed.
& 2205/PUN/2017 A.Y. 2009-10 : 18. Since the facts and issues involved in the appeal of the assessee for the assessment year 2009-10 are identical to the facts of the case for assessment year 2008-09, therefore, our decision in