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Income Tax Appellate Tribunal, ‘C’ BENCH, BENGALURU
Before: SHRI INTURI RAMA RAO & SHRI LALIT KUMAR
Date of hearing : 31/10/2017 Date of pronouncement : 17/01/2018 O R D E R Per INTURI RAMA RAO, AM :
These are appeals filed by the revenue directed against different orders of the ld. Commissioner of Income-tax (Appeals), Gulbarga, [ld.CIT(A)] for the assessment years 2008-09 and 2009-10.
The revenue raised the following identical grounds of appeal
for both the assessment years. & 856/Bang/201 Page 2 of 7
1. On the facts and in the circumstances of case and in the law, the Ld.CIT(A), Gulbarga, grossly erred in holding that the advances given by the company to its shareholders, holding shares in excess of 10%, which he himself upheld as deemed dividend u/s 2(22)(e), should not suffer TDS u/s 194, by invoking provisions of section 115O and further erred by totally ignoring the fact that the company had not suffered dividend distribution tax u/s 115O and hence such advances very much fell within the ambit of section 194 for the purpose of TDS.
2. On the facts and in the circumstances of case and in the law, the Ld.CIT(A), Gulbarga, erred in not verifying the factual position as to where the assessee-company has paid any dividend distribution tax u/s 115-O of the Income Tax Act,1961 in respect of the advances given to the shareholders of the company, holding shares in excess of 10%.
3. On the facts and in the circumstances of case and in the law, the Ld.CIT(A), Gulbarga, erred in giving relief as per the provisions of section 194, which states that ‘..............provided also that no such deduction shall be made in respect of any dividend referred to in section 115-O’. in spite of the fact that the advances given to the shareholder which are upheld as deemed dividend u/s 2(22)(e) and further erred in ignoring the fact that the deemed dividend did not suffer any dividend distribution tax u/s 115-O of the Income Tax Act, 1961.
4. The appellant craves leave to add, amend, alter or modify or substitute any of the grounds urged above.
3. Briefly, facts of the case are that the respondent-assessee is a company duly incorporated under the provisions of the Companies Act 1956. It is engaged in the business of extraction and sale of iron ore minerals. The Deputy Commissioner Income-tax (TDS), Ballari, [hereinafter referred to as the ‘TDS Officer’] noticed that the respondent-assessee company made payment by way of advance to the shareholders viz., S/Shri B.Deepak Singh, B.Dilip Singh and B.S.Praveen Singh, who are holding shares in the said company exceeding 10% of the shares of the company. The TDS officer also noticed that the respondent-assessee had accumulated profits and reserves to the tune of Rs.7,57,88,477/- for the financial year ending on 31/03/2006 and Rs.12,60,87,8d02/- for the financial year ending & 856/Bang/201 Page 3 of 7 on 31/03/2008. In the circumstances, the TDS officer was of the opinion that the respondent-assessee company should have deducted tax at source u/s 194 as the payments made to the above-mentioned shareholders constituted deemed dividend within the meaning and scope of the provisions of section 2(22)(e) of the Income-tax Act,1961 [hereinafter referred to as 'the Act'] Accordingly, he issued show-cause notice vide letter dated 28/01/2011 proposing to treat the respondent- assessee company as a company in default as provided u/s 201(1) for alleged default of non-deducting tax at source on the deemed dividend.
In response to show-cause notice, the respondent-assessee filed an explanation stating that the payments were made to the shareholders only for the business purpose of the company i.e. to purchase agricultural lands, as the company was barred from buying agricultural lands by an Act of the Karnataka State and further pleaded that the amount of accumulated profits should be calculated after setting off of deemed dividend in the earlier year and profit up to the date of making advance alone should be considered. The said contention of the assessee-company was rejected by the TDS officer by holding that the explanation that the advance was made for business purpose of the assessee-company cannot be believed, as no evidence was led in support of the contention that the shareholders have shown agricultural income in their respective hands. Therefore, the TDS Officer passed an order u/s 201(1)/201(1A) dated 25/03/2011 for the assessment year 2008-09 holding the assessee as the assessee in default and demanded tax u/s 194 of Rs.38,30,348/- and interest for delay in payment of TDS u/s 201(1A) of Rs.16,70,796/- aggregating to Rs.56,22,681/-. For the financial year ending on 31/03/2009 for failure to deduct tax at source u/s 194 levied TDS amount of Rs.54,26,381/-and interest u/s 201(1A) of Rs.17,04,077/-.
Being aggrieved, appeals were preferred before the ld.CIT(A), who vide impugned orders, though rejected the contention of the assessee-company that advances were made for business purposes & 856/Bang/201 Page 4 of 7 however granted relief on the ground that the case of the assessee- company is covered by the second proviso to section 194, which provides that no tax deduction at source is required to be made in respect of dividend which is covered by section 115-O of the Act.
We heard rival submissions and perused material on record. The issue in the present appeal is whether TDS officer was justified in holding the assessee company as ‘assessee in default’ u/s 201(1) and levying consequential interest u/s 201(1A) of the Act on the payments made to the shareholders, treating as deemed dividend, who are holding more than 10% of the shares. The undisputed facts are that the shareholders viz., S/Shri B.Deepak Singh, B.Dilip Singh and B.S.Praveen Singh, are holding shares in the respondent assessee-company more than 10% of the total share holding. It is also undisputed that payments are made by the assessee-company and the assessee-company is having accumulated profits of more than the amount of advance made to the shareholders. The only contention advanced before the TDS officer as well as the ld. CIT(A) is that advances are made by the respondent-assessee company for the business purpose of the company i.e. to buy agricultural land by the company. This contention was controverted by TDS officer by holding that the respective shareholders have shown agricultural income in the respective hands but not in the hands of the company. No documentary evidence was led in support of this contention. Ld. CIT(A), in absence of documentary evidence in support of this contention, had confirmed the finding of the TDS officer that advances are not made to the shareholders for business purpose of the company. The assessee company is not in appeal before us on this finding of the ld.CIT(A). However the ld.CIT(A) granted relief placing reliance on the second proviso to section 194 of the Act which provides that no tax deduction at source is required in respect of payments which are covered by section 115-O of the Act. Therefore, it is appropriate to extract the provisions of section 115-O of the Act: & 856/Bang/201 Page 5 of 7 “Tax on distributed profits of domestic companies. 115-O.(1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2003, whether out of current or accumulated profits shall be charged to additional income- tax (hereafter referred to as tax on distributed profits) at the rate of fifteen per cent. (1A) The amount referred to in sub-section (1) shall be reduced by,— (i) the amount of dividend, if any, received by the domestic company during the financial year, if— (a) such dividend is received from its subsidiary; (b) the subsidiary has (c) .... provided that the same amount of dividend shall not be taken into account for reduction more than once; (ii) the amount of dividend, if any, paid to any person for, or on behalf of, the New Pension System Trust referred to in clause (44) of section 10. Explanation.—For the purposes of this sub-section, a company shall be a subsidiary of another company, if such other company, holds more than half in nominal value of the equity share capital of the company.] (2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on distributed profits under sub-section (1) shall be payable by such company. (3) The principal officer of the domestic company and the company shall be liable to pay the tax on distributed profits to the credit of the Central Government within fourteen days from the date of— (a) declaration of any dividend; or (b) distribution of any dividend; or (c) payment of any dividend, & 856/Bang/201 Page 6 of 7 whichever is earliest. (4) The tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid. (5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) or the tax thereon. 11[(6) Notwithstanding anything contained in this section, no tax on distributed profits shall be chargeable in respect of the total income of an undertaking or enterprise engaged in developing or developing and operating or developing, operating and maintaining a Special Economic Zone for any assessment year on any amount declared, distributed or paid by such Developer or enterprise, by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2005 out of its current income either in the hands of the Developer or enterprise or the person receiving such dividend”:
It is also essential to deal with the legislative history of enactment of section 115-O of the Act. By the Finance Act 1997, dividend income was exempt from levy of tax with effect from 01/04/1998. Simultaneously the Parliament has enacted section 115-O of the Act for the purpose of introducing a new scheme of tax on distributed profits of the domestic companies. The dividend income in the hands of the individual shareholder is exempt by virtue of the provisions of section 10(34) of the Act. The provisions of section 194 were not made applicable in respect of dividend covered by the provisions of section 115-O of the Act by virtue of second proviso inserted by the Finance Act 2003 with effect from 01/04/2003. From mere reading of the provisions of 115-O extracted above, it is clear that the provisions of section 115-O are applicable only to the distributed dividends which include interim dividend. Since deemed dividend u/s 2(22)(e) is not a distributed dividend, it is not covered by section 115-O. Therefore, the provisions of second proviso to Section 194 not applicable. Thus the CIT(A) had misdirected himself by treating the dividend income u/s 2(22)(e) on par with distributed dividend. The provisions of section & 856/Bang/201 Page 7 of 7 194 continue to apply even after enactment of the provisions of section 115-0 to the deemed dividend u/s 2(22)(e) of the Act. Thus, the order of the ld.CIT(A) is against the very plain provisions of the Act which cannot be sustained.
In the result, the appeals filed by the revenue are allowed.
Order pronounced in the open court on 17th January, 2018.