THE RELIANCE MOTOR COMPANY PRIVATE LIMITED ,CHENNAI vs. ACIT CORPORATE CIRCLE 3(1), CHENNAI

आदेश /O R D E R

PER MAHAVIR SINGH, VP:

The L'd CIT(A) erred in holding that the provisions of section 2(22)(e) of i. the Income Tax Act, 1961 are applicable to the sum of money received by the Appellant from the M.Ct.M Corporation Private Limited. The L'd CIT(A) failed to appreciate that none of the shareholders who ii. beneficially hold more than 10% of the shares carrying voting rights in lending company beneficially hold more than 20% of shares carrying voting rights in the assessee company. The L'd CIT(A) erred in holding that what is to be considered for the iii. purpose of section 2(22)(e) is the voting power. The L'd CIT(A) ought to have found that both the section 2(22)(e) and section 2(32) uses the beneficial ownership test only. iv. The L'd CIT(A) ought to have appreciated that the amount of Rs. 71,00,000 was received by the Appellant towards the allotment of shares to M.Ct.M Corporation Private Limited and the shares have been allotted against the money received.

Without prejudice to above clauses stated in Ground 3, even where v. provisions of section 2(22)(e) are applicable to the transaction, the L'd CIT(A) ought to have found that the same would be taxable only in the hands of the shareholders and not the receiving company.

3 3. Brief facts are that the assessee company filed its return of income by filing audit report in Form No.3CD u/s.44AB of the Act. This return was processed u/s.143(1) of the Act and thereafter notice u/s.147 r.w.s. 148 of the Act was issued. The reasons recorded for reopening of assessment was that the assessee company has received a loan of Rs.71 lakhs from M.Ct.M Corporation P Ltd. As the assessee company’s shareholders who are having substantial interest are having 10% voting power in the above said company, the loan is to be treated as deemed dividend in the hands of the assessee company as per the provisions of section 2(22)(e) of the Act. The assessee during the course of assessment proceedings stated that the provisions of section 2(22)(e) of the Act would not apply to loan amount of Rs.71 lakhs received from M.Ct.M Corporation P Ltd, as none of the shareholders who beneficially hold substantial interest holds also more than 10% in the lending company i.e., M.Ct.M Corporation P Ltd. The assessee filed complete details before AO in support of the claim of the shareholders who hold more than 10% beneficial interest in the lending company do not beneficially hold substantial interest and since none of the shareholders who own more than 10% beneficial interest in the lending company holds substantial interest beneficially in the assessee, the provisions of section 2(22)(e) of the 4 Act are not applicable in this case. The AO considered the reply of assessee and finally invoking the provisions of section 2(22)(e) of the Act treated this loan of Rs.71 lakhs as deemed dividend in the hands of the assessee and added to the returned income of the assessee. Aggrieved, assessee preferred appeal before CIT(A).

Aggrieved, assessee came in appeal before the Tribunal.

5 5. Before us, the ld.counsel argued that none of the shareholders who beneficially hold more than 10% of the shares carrying voting rights in lending company beneficially hold more than 20% of shares carrying voting rights in the assessee company. The ld.counsel stated that both the sections 2(22)(e) & 2(32) of the Act uses the beneficial ownership tests only. None of the shareholders who beneficially hold more than 10% shares carrying voting rights in the lending company. The assessee before us and even the same before the AO and CIT(A) filed details of share holding pattern as under:- As on 01st April 1999 Name of the Shareholder No. of Shares Percentage held M Ct Muthiah 2,500 50% Kamala Muthiah 2,500 50% TOTAL 5,000 100% As on 31st March 2000 Name of the Shareholder No. of Shares Percentage held M Ct Muthiah 60,500 51% Kamala Muthiah 17,500 15% Arti Meenakshi 15,300 13% Nandini Valli 15,300 13% Art Meenkashi Trust 5,000 4% Nandini Valli Trust 5,000 4% TOTAL 1,18,600 100% The ld.counsel for the assessee also stated that this issue is now settled by the decision of Hon’ble Supreme Court in the case of CIT

6 vs. Madhur Housing and Development Company, (2017) 100 CCH 46 ISCC, wherein the judgment of Hon’ble Delhi High Court in the case of CIT vs. Ankitech (P) Ltd., (2012) 340 ITR 14 affirmed. He narrated that the Hon’ble Delhi High Court has concluded that, it is the definition of dividend which is enlarged by the deeming provision of section 2(22)(e) and not that of ‘shareholder’ and therefore a concern which is given loan or advance by a company cannot be treated as shareholder/member of the latter simply because a shareholder of the lender company holding voting power of 10% or more therein has substantial interest in such concern and such loan or advance cannot be treated as deemed dividend u/s.2(22)(e) of the Act at the hands of the concern. According to Hon’ble High Court any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non-members. The second category specified under Section 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of deeming shareholder‖, then the Legislature would have 7 inserted deeming provision in respect of shareholder as well, that has not happened. Hon’ble High Court observed that most of the arguments of the learned counsels for the Revenue would stand answered, once we look into the matter from this perspective. 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 CBDT is concerned, 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,

8 and that is the correct legal position, such a circular would be of no avail. The definition of shareholder is not enlarged by any fiction.

vi. The L'd CIT(A) erred in adding back a sum of Rs.76,55,667 towards VRS payments. He must have found that the sum was already added back by the Appellant in computing the loss of Rs.47,24,790.

9 vii. The L’d CIT(A) erred in holding that VRS payments made by the assessee to its employees in connection with Voluntary Retirement Scheme is in the nature of Capital expenditure.

10 decide the same. This issue of assessee’s appeal is set aside and allowed for statistical purposes.

Order pronounced in the open court on 15th June, 2022 at Chennai.