THE DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(3),, AHMEDABAD vs. M/S. AMIT INTERTRADE PVT. LTD.,, AHMEDABAD

आदेश/O R D E R

PER WASEEM AHMED ACCOUNTANT MEMBER:

The captioned appeal and CO have been filed at the instance of the Revenue and the assessee against the order of the Learned Commissioner of Income Tax (Appeals)-1, Ahmedabad, dated 29/06/2019 (in short “Ld. CIT(A)”) arising in the matter of assessment order passed under s. 143(3) r.w.s. 147 of the Income Tax

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Act, 1961 (here-in-after referred to as "the Act"). The assessee has filed the Cross Objection in the Revenue’s appeal bearing ITA no. 2259/Ahd/2016 for the Assessment Year 2007-2008.

4.1 As per the assessee, the provisions of section 2(22)(e) are applicable on the shareholder only whereas assessee company is not holding any share in M/s JP Iscon Ltd. Hence, the provisions of section 2(22)(e) are not applicable in its case. However the AO treated the above unsecured loan as deemed dividend under the

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provision of section 2(22)(e) of the Act, by observing that both parties are closely held company and having common shareholders holding more than 20% share in each company i.e. the assessee company and JP Iscon Ltd. At the same time, there was also sufficient reserve and surplus of Rs. 20,65,96,173. Accordingly the AO made addition of Rs. 8,94,41,125/- under section 2(22)(e) of the Act to the total income of the assessee.

4.2 The assessee carried the matter before the learned CIT (A) who deleted the addition made by the AO by observing as under: 2.6. I have carefully perused the assessment order and the written submission made by the learned A.Rs. It is observed that it is fact that Shri Jateen Gupta & Shri Amit Gupta were having substantial share holding in both the companies i.e. Giver Company well as the Recipient company. The express provisions of section 2(22)(e) show that there are three limbs of the said section i.e. (i) the payment by a company by way of advance or loan should have been made to a shareholder who is a beneficial owner of the shares and substantial interest. (ii) or the payment should be made to any concern in which such share holder is a member or partner and in that concern, he should have a substantial interest; & (iii) or the company makes payment, or on its behalf payment is made for individual benefit of any such shareholder to the extent to which the company in either case possesses accumulated profits. I 2.7. In the captioned case, the payment has been made by J. P. /scon Limited, to the appellant company but the appellant company is not a registered share holder of J. P. Iscon Limited. From the facts, it is seen that appellant is not a shareholder in the lender company however, assessing officer treated the same as deemed dividend in hands of appellant company. It is also submitted that the transaction was not in the nature of advance or loan and it was simply inter corporate deposits (ICD). The appellant had provided for the interest expenses on the said ICD borrowed and have deducted the necessary TDS and have also paid back the said ICD along with interest during F. Y I 2008-09. Appellant's main objection was that in view of the various decisions including special bench of ITAT Mumbai in the case of Asstt. CIT v/s. Bhaumik Colour (P) Ltd.[2009] 118 ITD 1 (Mum.) (SB) and jurisdictional High Court decision in the case of CIT v/s Daisy Packers (P.) Ltd [2013] 40 taxmann.com 480 (Gujarat) 3. Bombay High Court in the case of CIT vs. Impact Containers (P.) Ltd 367 ITR 346 [2014] (Bombay) and other decisions (supra), the addition of deemed dividend cannot be made in the • hands of the company. The view taken by the I. T.A. T. Mumbai Special Bench in the case of ACIT Mumbai vs. Bhaumik Colour (P) Ltd has been approved by the Hon'ble Bombay High \ Court in the case of CIT vs. Universal Medicare Private Limited (2010) 324 ITR 263 ' (Bom.) The Gujarat High Court in the case of CIT v/s Daisy Packers (P) Ltd decided the issue in favour of the assessee, relying on the decision of the Division Bench of the High Court in CIT v. Ankitech (P.) Ltd. (2012) 340 ITR 14 (Del) wherein it was held that if the assessee-company does not hold a share in other company from which it had received deposit then it cannot be treated

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to be a deemed dividend under Section 2(22)(e) of the Act. From the reading of the provisions of section 2(22)(e), it is seen that the provision is intended to tax the dividend in the hands of a shareholder and the deeming provision as it applies to the case of loan or advance by a company to a concern in which is shareholder and has substantial interest, is based on the presumption that the loan or advance would ultimately be made available to the shareholder of the company giving loan or advance. Various court decisions e.g. ACIT v/s. Bhaumik Colour (P.) Ltd.(2009] 118 ITD 1 (Mum.) (SB) & jurisdictional High Court I decision in the case of CIT v/s Daisy Packers (P) Ltd [2013] 40 taxmann.com 480 (Gujarat), CIT vs. Impact Containers (P.) Ltd 367 ITR 346 [2014] (Bombay) and other decisions (supra) support this view that the deemed dividend u/s 2(22)(e) can only be I assessed in the hands of the person who is a shareholder of the lender company and I not in the hands of a person other than the shareholder. In view of the above facts and on the basis of the above referred decisions (supra), the addition made by the Assessing Officer u/s.2(22)(e) is held to be not justified and the same is deleted. The additions made by the A.O as deemed dividend u/s.2(22)€ of IT Act for Rs.8,94,41,125/- in the hands of the appellant company is directed to be deleted. The ground of the appellant is allowed.

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under consideration. Accordingly the AO in the case on hand has treated the amount of Rs. ₹ 8,94,41,125.00 as deemed dividend in the hands of the assessee on the reasoning that the transactions of advancing loan as discussed above falls within the purview of the provisions of section (2)(22)(e) of the Act. However, the learned CIT (A) was pleased to delete the addition made by the AO for the reasons as discussed in the aforesaid paragraphs.

8.1 The 1st question before us arises whether it is sine qua non that the assessee company, which is not a registered shareholder, obtains any loan from companies in which its shareholder also holding substantial share may brought under the scanner of deemed dividend. In this regard we find pertinent to refer the provisions of section 2(22)(e) of the Act which reads as under: (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 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 ;

8.2 On perusal of above provision what inferred is that the provision of section 2(22)(e) of the Act can only be invoked in case of shareholder who is holding substantial interest. The provision of section 2(22)(e) of the Act nowhere talks about taxing an entity/company who is not a shareholder holder in lender company but shareholder of such company holding substantial share in lender company. In this regard we find support and guidance from the judgment of Hon’ble Jurisdictional High court in Tax appeal no. 891 of 2016 in case of PCIT vs. Mahavir Inductomelt Pvt Ltd where in similar facts the Hon’ble court held as under: "50. Identical question came to be considered by the Division Bench of this Court in Tax Appeal No. 253 of 2015. After considering the decision of the Bombay High Court in the case of CIT vs. Impact Containers Private Limited & ors rendered in I TA No. 114 of 2012 and the decision of the Delhi High Court in thecase of CIT vs. Ankitech Pvt Lt d reported in 340 ITR 14 (Del) and on interpreting Section 2(22)(e), in para 4 has observed and held as under:

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"4.Shri Bhatt, learned Counsel appearing on behalf of the revenue has as such tried to justify the decision of the Delhi Court in the case of Ankitech Pvt. Ltd. (Supra) and has vehemently submitted that the Delhi High Court has not considered the third category i.e. shareholder in the assessee Company holding not less than 10% of the voting power in the Company from whom the loan or advance is taken. However, on considering Section 2(22)(e) of the Act, we are not at all impressed with the aforesaid. If the contention on behalf of the revenue is accepted, in that case, it will be creating the third category / class, which is not permissible. What is provided under Section 2(22)(e) of the Act seems to be that the assessee company must be a shareholder in the Company from whom the loan or advance has been taken and should be holding not less than 10% of the voting power. It does not provide that any shareholder in the assessee- Company who had taken any loan or advance from another Company in which such shareholder is also a shareholder having substantial interest, Section 2(22)(e) of the act may be applicable. 5.1. Considering the aforesaid decision of the Division Bench of this Court and the facts narrated herein above, more particularly, considering the fact that the assessee was not shareholder of Mahavir Rolling Mills Pvt Ltd to whom loan was given, it cannot be said that the learned Tribunal has committed any err or in deleting the addition made by the Assessing Officer on deemed dividend."

8.3 Coming to the case on hand, admittedly the assessee company is not holding any shares or rights of M/s. JP Iscon Ltd. Thus considering the above discussion and judgment of Hon’ble jurisdictional court in case of Mahavir Inductomelt (Supra), the AO was not justified in invoking the provision of section 2(22)(e) of the Act in its case. The learned CIT(A) rightly deleted the addition made by the AO.

8.4 At this juncture, it is also important to deal with the contention raised by the learned DR at the time of hearing as discussed above after referring to the judgment of Hon’ble Supreme Court in the case of Gopal and Sons (HUF) Vs. CIT reported in 77 Taxmann.com 71. In Gopal And Sons (HUF) v. CIT [2017] 391 ITR 1/77 taxmann.com 71/245 Taxman 48 (SC) the assessee a HUF received a loan from a company in which it had 37.12% of the total shareholdings. The shares were issued in the name of Karta and in the return filed to the ROC it was stated by the company that the registered ownership was in the name of Karta and the HUF was the beneficial shareholder. The apex court held that the payment was made to the HUF which was covered by the term 'concern' given in Explanation 3 to section 2(22). The karta was a member of the HUF and he had not less than 20% of the income of the HUF as his entitlement. The apex court, accordingly, held that the amount of loan given by the company to the HUF was taxable as deemed dividend.

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8.5 However, we note that in the case which arose before the Madras High Court in CIT v. T. Abdul Wahid & Co. [2020] 119 taxmann.com 497/275 Taxman 101/428 ITR 456 the facts were that the assessee, a partnership firm, received unsecured loan from a company and the Assessing Officer opined that one of partners of assessee-firm, being also a shareholder in the said company, holding 26.25 per cent shares had substantial interest in the firm and, consequently, concept of deemed dividend under section 2(22)(e) of the Act would apply. The High Court, on appeal by the Revenue, held that since payment had been made to the assessee, a partnership firm and assessee was not a shareholder in company, it was neither a loan nor an advance, but a deferred liability and, thus, section 2(22) (e) of the Act would not apply.

8.6 The decision of the Supreme Court in the case of Gopal and Sons (HUF) v. CIT [2017] 77 taxmann.com 71/245 Taxman 48/391 ITR 1 was distinguished by the Madras High Court after observing that "as in the case before the Supreme Court the assessee was the beneficial shareholder, whereas on facts, it was not so, in the assessee's case. Admittedly, the assessee in the case on hand was neither the beneficial owner of the shares nor registered owners of the shares. Accordingly, in our humble understanding, the principles laid down by the Hon’ble Supreme Court in the case of Gopal and Sons (HUF) Vs. CIT reported in 77 Taxmann.com 71 are not applicable in the given facts and circumstances. Thus the ground of appeal raised by the Revenue is hereby dismissed.

8.7 In the result appeal of the Revenue is dismissed.

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Coming to the CO. No. 162/AHD/2016, raised by the assessee

9.1 In the result, the CO filed by the assessee is dismissed as infructuous.

Order pronounced in the Court on 28/02/2022 at Ahmedabad.

Sd/- Sd/- (MAHAVIR PRASAD) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy)

Ahmedabad; Dated 28/02/2022 Manish