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Income Tax Appellate Tribunal, DELHI BENCH “B”, NEW DELHI
Before: SH. BHAVNESH SAINI & SH. L. P. SAHU
Department by : Sh. Anil Kr. Sharma, Sr. DR Assessee by : None. Date of hearing : 14.11.2017 Date of pronouncement : 16.11.2017 O R D E R PER BHAVNESH SAINI, J.M :
This appeal by revenue has been directed against the order of Ld. CIT(A)–I, New Delhi, dated 29.12.2015 for assessment year 2012-13 challenging the deletion of addition of Rs. 5.35 crores made on account of deemed dividend u/s 2(22)(e) of the IT Act.
Briefly the facts of the case are that during the course of the assessment proceedings, it was observed by the AO that assessee company has taken loan from M/s ADI Media (P) Ltd., as under: SI. Name Opening Closing Gross Addition to Repayment of Rate of No. balance balance loan loan interest interest accrued - 3,00,00,000 - 12% 16,81,967 3,00,00,000 ADI Media Pvt. 1 Ltd. - 5,43,00,000 13.75% 21,78,172 4,63,00,000 ADI Media Pvt. 2 80,00,000 Ltd. Total 8,43,00,000 80,00,000 38,60,139 7,63,00,000
It was also observed by the AO that M/s ADI Media (P) Ltd. is holding 8.43% shares of the assessee company. The assessee was asked to furnish details of shareholding of M/s ADI Media (P) Ltd., which is reproduced in the orders of authority below showing shareholdings of M/s ADI Media (P) Ltd of 8.43%. It was further observed by the AO that Sh. Nishith Arora is holding 90.72% shares of the assessee company and also also owns 50% shares of M/s ADI Media (P) Ltd. from whom the assessee company had taken loan under year consideration. It was also observed by the AO that M/s ADI Media (P) Ltd has accumulated profit as on 31.03.2012 of Rs. 5,35,60,758/-. It was observed that M/s ADI Media (P) Ltd., even though having surplus profit/reserve has not declared any dividend to its shareholder. Considering the facts the assessee company has taken loan from M/s ADI Media (P) Ltd., which is controlled by Sh. Nishith Arora and Anju Arora who together holds 91.57% shares and also having control over M/s ADI Media (P) Ltd., by virtue of holding of 50% shares (each) who is also shareholders of 8.43% shares of the assessee company, the AO asked the assessee to explain why provisions of section 2(22)(e) of the IT Act may not be applicable in the case of assessee for having accepted the loan from M/s ADI Media (P) Ltd. The Assessee explained before AO that assessment of ICD is not covered in the preview of Section 2(22)(e) of the IT Act. The Assessee has also explained the difference between loan and deposit in the submissions and cited various case laws in this regard. The assessee also submitted that the amount of lent by M/s ADI Media (P) Ltd to ADI BPO (P) Ltd., is an incorporate deposit on a fix rate of interest, therefore, Section 2(22)(e) will not be applicable. The AO, however, rejected the contention of assessee and added Rs. 5.35 crores to the extent of accumulated profit available in the hands of M/s ADI Media (P) Ltd as deemed dividend.
The assessee challenged the addition before Ld. CIT(A) and submission of the assessee is reproduced in the impugned order in which the assessee briefly explained that M/s ADI Media (P) Ltd had given incorporated deposit subject to interest, copies of board resolution were filed. It was explained that it was neither loan nor advance, it was a transaction in the ordinary course of business would be outside the preview of the Section 2(22)(e) of the IT Act. The assessee produced relevant documents before Ld. CIT(A) in support of above contentions.
Ld. CIT(A) considering the submissions of the assessee in the light of the matter on record deleted the addition by holding provisions of section 2(22)(e) would not apply in the case of the assessee. His findings in the impuged order are reproduced as under: I have carefully gone through the submissions of the AR on the aspect of deposit. The AR placed reliance on numerous judicial pronouncements to explain the characteristics of a deposit. As laid down by various Courts, the characteristics of a deposit, inter-alia include the following: (a) The term deposit is an act of giving money or other property to another who promises to preserve it or use it and return it in kind. (b) The depositor goes to the depositee for investing his money primarily with the intention of earning interest. (c) The obligation to repay the deposit depends on the maturity period fixed or the terms of the agreement relating to the demand. (d) A deposit does not impose an immediate obligation on the depositee to seek out the depositor and repay him. He is to keep the money till asked for it. (e) In the case of a deposit it is the duty of the depositor to go to the banker or the person with whom the money has been deposited, as the case may be, and make a demand for the repayment of the same. (f) The process of accepting and giving ICDs is a means of alternative financing and cannot be treated as loan or advance. (g) The term deposit and loan may not be mutually exclusive, but in each case, the intention of the parties and the circumstances must be considered.
The AR of the appellant explained the characteristics of deposit before me. It is seen that these characteristics are applicable in the case of the appellant. The amount advanced by ADI Media Pvt. Ltd. to the appellant is for business expansion, for meeting the short term requirement of investing in shares of MPS Limited. The said amount carries a fixed rate of interest and the appellant has paid such interest to M/s ADI Media Pvt. Ltd., which has also been suo moto disallowed by the appellant under section 14A of the Act. The minutes of a meeting merely summarize the discussions which take place in a Board Meeting. No doubt, the minutes state that ADI Media Pvt. Ltd. shall provide ICD to the appellant out of surplus funds, however, it even states that the funds may be borrowed from external agencies and if that be the case, then the rate of interest shall be 0.5% higher that the interest on loans availed. The facts of the appellant prove that the deposit placed with the appellant were at a rate of interest which was 0.5% higher than the interest paid on loans taken by M/s ADI Media Pvt. Ltd. from external agencies. The AO has ignored the aforesaid facts from the minutes of the meeting and has merely done cherry-picking of the words. Further, on perusal of the Minutes, it is clear that the Board of M/s ADI Media Pvt. Ltd. reviewed the requirement of funds of the appellant. Review of a requirement can only happen if a request is placed and not without a request. Accordingly, I am of the considerate view that the amount advanced by M/s ADI Media Pvt. Ltd. to the appellant was in the nature of ICD which was purely a business transaction. It was neither a loan, nor an advance and therefore, the provisions of section 2(22)(e) of the Act are not attracted. The AO in his order has further stated that the amount placed as deposit by M/s ADI Media Pvt. Ltd. with the appellant was not out of borrowed funds but out of accumulated profit. It was submitted by the appellant that M/s ADI Media Pvt. Ltd. had taken a loan of Rs. 7.8 crores from financial institutions. The deposit placed with the appellant is Rs. 8.03 crores (and not Rs. 8.43 crores as noted by the AO) which is almost the same as the total loan taken by ADI Media Pvt. Ltd. from external agencies. (The excess Rs. 0.23 crores is out of surplus funds of ADI Media Pvt. Ltd.). It is not under doubt that ADI Media had sufficient accumulated balance, however, that by itself cannot give rise to an interpretation that the entire deposit placed by ADI Media Pvt. Ltd. was out of its surplus funds, more so when the flow of funds was such that the loan taken by ADI Media Pvt. Ltd. can be linked with the corresponding deposit placed with the appellant. However, as already observed in the preceding paragraphs since the nature of the transaction is of ICD on a fixed rate of interest, it does not make any difference, whether it is out of own funds or borrowed funds, the same is not covered within the ambit of deemed dividend.
The AR further placed reliance, on the decision of Delhi High Court in the case of CIT v. Ankitech (P) Ltd. [2012] 340 ITR 14. This decision, being the decision of the jurisdictional High Court, is of paramount importance. I have gone through the facts of this decision in detail and the same is summarized with reference to the appellant’s case. (a) The facts in the case of the appellant are similar to the decision of the Hon’ble Court in Ankitech (P) Ltd. wherein the Assessee Company (APL) received advance from Jakson Generators (P) Ltd. (JGPL). The AO treated the advance as deemed dividend in the hands of APL. because 2 shareholders, were holding substantial interest in both the companies. APL was not a shareholder of JGPL. It was held that “A dividend cannot be taxed in the hands of a (b) non-shareholder”. Since in the instant case of the appellant, ADI BPO Services Ltd. (the Appellant) is not a shareholder of ADI Media Pvt. Ltd., therefore the amount advanced to the appellant by ADI Media Pvt. Ltd. cannot be brought to tax in the hands of the appellant. (c) The Court held that the deeming fiction of section 2(22)(e) of the Act is only to tax the amount in the hands of the shareholder and not a person other than the shareholder as this was never the intent of the legislature. It is necessary to quote the relevant paras from the order of the Hon’ble Court: "25 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 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 inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the revenue would stand answered, once we look into the matter from this perspective.
26 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." (d) The concept of deemed dividend was to tax a shareholder who was getting direct/ indirect benefit from the company which advances its accumulated profits tosuch a shareholder in the form of loans and escapes from the liability of Dividend Distribution Tax (DDT). Such intent is absent in the case of the appellant as no loan/ advance has been given to the common shareholder of the appellant i.e. M/s ADI Media Pvt. Ltd., and Mr. Nishith Arora. Hence, it cannot be said that directly/indirectly some benefit is being given to the shareholders. As already observed in the preceding paragraphs, the amount advanced by ADI Media Pvt. Ltd. to the appellant is in the nature of ICD which is outside the purview of section 2(22)(e) of the Act. Respectfully following the decision of the jurisdictional Delhi High Court in the case of Ankitech (P) Ltd. (supra), I am of the considerate view that the addition made on account of deemed dividend in the hands of the appellant is unwarranted and deserves to be deleted, more so when the appellant is not even a shareholder of M/s ADI Media Pvt. Ltd. It is also worth mentioning here that M/s ADI Media Pvt. Ltd., though being a shareholder of the appellant, holds only 8.43% shares of the appellant, i.e., less than 10% share in the voting power of the appellant and therefore, the provisions of section 2(22)(e) of the Act are not applicable her 6. After considering the submission of the Ld. DR, we are of the view no interference is called for in the matter.
Ld. CIT (A) found that the amount advance by M/s ADI Media (P) Ltd to the assessee company is for business expansion for meeting the short term requirements for investing in shares of NPS Ltd. The said amount carries a fixed rate of interest and assessee paid such interest to M/s ADI Media (P) Ltd.
Ld. CIT(A) considering the minutest of a meeting and other material on record found that the amount advance by M/s ADI Media (P) Ltd to the assessee was in nature of ICD which was purely business transaction. Ld. CIT(A) also on going through the details found that M/s ADI Media (P) Ltd though being shareholders of the assessee holds only 8.43% shares of the assessee company i.e. less than 10% for voting power of the assessee company and therefore, provisions of Section 2(22)(e) of the IT Act are not applicable to the case of the assessee. Thus, specific findings of the facts recorded by Ld. CIT(A) based on material on record have not been rebutted by the revenue department through any evidence or material on record. In the absence of any evidence or material on record against the assessee, the findings of fact recorded by CIT(A) that transaction between assessee company and M/s ADI Media (P) Ltd is a business transaction and that M/s ADI Media (P) Ltd holds only 8.43% shares of the assessee i.e. less than 10% share in the voting power of the assessee company clearly support the findings of the CIT(A) that Provisions of Section 2(22)(e) of the IT Act are not application in the present case of the assessee. No infirmity have been pointed out in the order of the CIT(A) in deleting the addition.
We may refer to recent board circular F No. 279/Misc./140/2015/ITJ, Circular No. 19/17, dated 12.06.2017 in which the board clarified the settled view on Section 2(22)(e) of the IT Act, trade advances and in para 3 it is directed “in view of the above it is a settled position that trade advances which are in the nature of commercial transaction would not fall within the ambit of the word “Advance” in the Section 2(22)(e) of the IT Act. Accordingly, henceforth, appeals may not be filed on this ground by officers of the department and those already filed in the courts/Tribunals may be withdrawn/not pressed upon.
In view of the above discussions in the light of the findings of the Ld. CIT(A) and above board circular, we are of the view no interference is called for in the matter. The departmental appeal, therefore stand dismissed. In the result, appeal of the revenue is dismissed. Order pronounced in the open court on 16.11.2017. Sd/- Sd/- (L. P. SAHU) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER Date: 16.11.2017 @m!t