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Income Tax Appellate Tribunal, “D” BENCH, CHENNAI
Before: SHRI DUVVURU RL REDDY & SHRI S. JAYARAMAN
आदेश/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed this appeal against the order of Commissioner of Income Tax (Appeals)-11, Chennai in /CIT(A)-11 dated 28.02.2017 for assessment year 2012-13.
During the assessment for ay 2012-13, the AO found that M/s. 2.
Vital Industries India Pvt. Ltd., the assessee, received a loan of Rs.
:-2-: ITA No. 1184/Mds/2017 1,57,89,726/- from M/s. MGM Entertainments Private Limited with whom one Mr. MGM Anand is a common shareholder and he has substantial interest in both the companies. i.e. 30% of the total shares in MGM Entertainments Private Limited and 70% of the shares in M/s. Vital Industries India Pvt Limited. The assessee's contentions that section 2(22)(e) is applicable only to shareholders of the company, based on the scope and intention of the legislature provided in the Finance Act, 1987 and also by relying on the decisions of Hon'ble Delhi High Court in the case of CIT vs National Travel Services (2012) 347 ITR 305& the Hon’ble Madras High Court in the case of CIT vs. Print Wave Services Private Limited (ITA No 747 of 2014) was rejected by the AO for the reason that the department is on appeal against the decision of Hon'ble Madras High Court before the Hon'ble Supreme Court and hence the jurisdictional High Court’s decision has not reached finality and hence treated the loan as dividend u/s 2(22)(e) and charged to tax u/ s 56 to keep the issue alive though the tax demand raised on this issue was stayed following the Hon'ble Madras High Court's decision. Aggrieved, the assessee filed an appeal and the CIT (A) dismissed the appeal. Aggrieved against the order of the CIT(A), the assessee filed this appeal with following grounds :
“The order of the Assessing Officer and learned CIT Appeals is contrary to the facts and circumstances of the case. The learned Assessing Officer and CIT Appeals ought to have appreciated the fact that question of deemed dividend does not arise in respect of advances paid by MGM Entertainments Pvt. Ltd., to the appellant company since the :-3-: ITA No. 1184/Mds/2017 appellant company is not a shareholder in MGM Entertainments Pvt. Ltd and therefore is not the beneficial owner of any shares in MGM Entertainment Pvt. Ltd. The learned Assessing Officer and CIT Appeals ought to have accepted the view that only the amount received by a shareholder who has substantial interest in a closely held company by way of advances from that company can be treated as "deemed dividend" and not a company which is not a shareholder of the other company from whom the advances are received. As regards advances received from MGM Entertainment Pvt. Ltd., we wish to state that this is purely in the nature of inter corporate loan provided by MGM Entertainment Pvt. Ltd., to support Vital Industries India Pvt. Ltd., to meet its funds requirements for working capital. The advances have been given by MGM Entertainment Pvt. Ltd., are purely out of business considerations to promote hotel business run by Vital Industries India Pvt. Ltd., at Bangalore. The learned Assessing Officer and CIT Appeals has failed to follow the judgment of the Hon'ble High Court of Madras dated 10.11.2014 in the case of CIT Vs. Print Wave Services Pvt. Ltd., in the tax case No.747 of 2014. In the said case, The Madras High Court has upheld the orders passed by CIT (Appeals) and ITAT Chennai who held that the deemed receipt of dividend can only be in the hands of a Substantial shareholder and considering that the assessee company itself is not a shareholder in the other company no dividend, normal or deemed, could have been received, by the assessee company as long as the assessee company was not a shareholder in the other concern. The case laws quoted by learned CIT appeals is not relevant for the facts of the case. We request that based on the above said submissions the appeal be allowed. ”
The AR submitted the same plea canvassed before the CIT (A) and emphasised that the assessee company does not hold shares in M/s. MGM Entertainments Private Limited and placed its reliance on the decision of Hon'ble Madras High Court in the case of CIT vs. Print Wave Services Private
:-4-: ITA No. 1184/Mds/2017 Limited in of 2014dt 10.11.2014. Per contra, the DR relied on the orders of the Lower authorities.
We heard the rival submissions . Let us examine the relevant portion of the order of the CIT(A) as under :
“ 4.3.2 Before the CIT(A), the appellant has contended that the appellant company does not hold shares in M/s. MGM Entertainments Private Limited and the appellant. Reliance was also placed on the decision of Hon'ble Madras High Court in the case of CIT vs. Print Wave Services Private Limited (cited supra). 4.3.3 The submissions made by the assessee have been carefully examined and the contentions of the assessee cannot be accepted for the following reasons: 1. Section 2(22)(e) reads as follows "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; From the plain reading of the section, it can be understood that dividend u/s. 2(22) includes loan or advance given "to any concern in which such shareholder is a member or a partner and in which he has a substantial interest". Further a company is covered under the meaning of the word 'concern'. Explanation 3 to clause 22 of Section 2 states that: "-For the purposes of this clause, -
:-5-: ITA No. 1184/Mds/2017 means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company;
After examining the facts of the assessee's case, the fulfilment of the conditions stipulated under Sec.2(22)(e) is tabulated below: S.No Conditions u/s. 2(22)(e) Fulfilment of condition in the Appellant’s case 1 Payment of loan or advance to Condition fulfilled the extent of accumulate profits by a closely held company. 2 Common shareholder has - Do - substantial interest in both the companies 3. The only moot question here is whether the dividend is taxable in the hands of the shareholder who has substantial interest in both the companies or in the hands of the appellant company. The Hon'ble Supreme Court in the case of Gopal and Sons (HUF) vsCIT [2017 391 ITR 1] held that "Even if we presume that it is not a registered shareholder, as per the provisions of Section 2(22)(e) of the Act, once the payment is received by the HUP and shareholder (Mr.Sanei, karta, in this case) is CL member of the said HUF and he has subetantial interest in the HUF, the payment made to the HUF shall constitute deemed dividend within the meaning of clause (e) of Section 2(22) of the Act. This is the effect of Explanation 3 to the said Section, as noticed above. Therefore, it is no gainsaying that since HUF itself is not the registered shareholder, the provisions of deemed dividend are not , attracted." The above-mentioned judgement of Hon'ble Supreme Court which is clearly in support of the stand taken by the AO. Therefore, there is no pre-condition that the assessee has to be a shareholder in order to attract provisions of Section 2(22)(e). In the given case, the appellant is the recipient of the loan which is to be treated as deemed dividend u/ s 2(22)(c). Therefore, the same has to be taxed in the hands of the appellant company.
4. I have perused the decision relied on by the AO in the case of CIT vs. National Travel Services [20121347 ITR 305 (Delhi) which is directly on the issue under consideration in favour of Revenue. I have briefly mentioned below the said decision:
:-6-: ITA No. 1184/Mds/2017 "Section 2(22) of the Income-tax Act, 1961 - Deemed dividend - Whether to attract provisions of section 2 (22)(e), person to whom loan or advance is made should be a shareholder as well as beneficial owner - Held, yes - Whether for purpose of section 2(22)(e), a partnership firm having purchased shares through its partners in company which has paid loans is to be treated as a shareholder and it is not necessary that it has to be 'registered shareholder' of company - Held, yes [In favour of revenue] .
The decision of Hon'ble Madras High court in the case of M/s. Print WaveServices Pvt. Ltd. (cited supra) relied on by the AR is not applicable to the appellant's case as facts and circumstances in both the cases are fundamentally different. In the decision relied on, the assessee company received a sum of Rs. 41,46,588/- from another private limited company which was stated to be a sister concern and on the same date the assessee company paid sum of Rs. 42,96,677/- to an individual who was the director in both the companies and having common interest in both the companies. It is clear from these facts recorded in the high court's decision that the ultimate recipient of loan amount was not the recipient company but the director having substantial interest in both the companies. Whereas in the appellant's case, the appellant itself is the recipient of the loan amount. Further, in the case relied on, the amount received by the assessecompany was shown as 'trade advance' whereas in the appellant's case it has been treated as a 'loan amount'. In view of these two distinguishable facts, I am of considered opinion that the decision relied upon by the appellant as mentioned above is not applicable to the facts and circumstances of the appellant's case. 4.3.4 In the facts and circumstances of the case, for the reasons mentioned above, I do not find any merit in the appeal of the assessee. Therefore, the aforesaid addition of the AO is upheld and the appellant's ground on this issue is dismissed.”
5. In this case, the fact remains that the assessee received a loan of Rs. 1,57,89,726/- from M/s. MGM Entertainments Private with whom one Mr. MGM Anand is a common shareholder and he has substantial interest in both
:-7-: ITA No. 1184/Mds/2017 the companies. i.e. 30% of the total shares in MGM Entertainments Private Limited and 70% of the shares in M/s. Vital Industries India Pvt Limited, the assessee. The basic question that falls for our consideration is whether the provisions of section 2(22)(e) are attracted at all ?Let us re-examine the relevant portion of the provisions as under :
“ (22) dividend” includes— (a) …………………………………………………………: (b)………………………………………………………….; (c)…………………………………………………………..; (d) ……………………………………………………………; (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)madeafter the 31st day of May, 1987, by way of advance or loan to any concern in which such shareholderhas a substantial interest (hereafter in this clause referred to as the said concern)] to the extent to which the company in either case possesses accumulated profits Explanation 3 to clause 22 of Section 2 states that: "- For the purposes of this clause, - (a) “concern” means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ; (b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern ;]”
From the above, it is seen that any payment made by a company in which public are not substantially interested, out of its accumulated profits, to a shareholder or to any concern in which such a shareholder is a member or :-8-: ITA No. 1184/Mds/2017 partner and has substantial interest, by way of loan or advance is deemed dividend income of the recipient. In this case, undisputedly assessee is the recipient of the loan from M/s MGM Entertainments Private Limited . It is also not disputed that M/s. MGM Entertainments Private Limited has accumulated profits. The assessee is not the shareholder of M/s. MGM Entertainments Private Limited , but it is the concern in which the shareholder of MGM Entertainments Private Limited , Mr. MGM Anand holds 70 per cent of equity share capital. Therefore, the provisions of section 2(22)(e) are very much applicable. We are fortified in our decisions from the decision of the Mumbai ITAT in the case of Extermpore Securities And Investments (P) Ltd., vs DCIT , 116 TTJ 525, Mumbai. On facts, all other decisions relied by the assessee are distinguishable.
In the result, the assessee’s appeal is dismissed.
Order pronounced on Thursday, the 15th day of February, 2018 at Chennai.