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Facts
The Revenue appealed the CIT(A)'s order deleting the addition made under section 2(22)(e) of the Income Tax Act, 1961. The AO had made an addition for deemed dividend on account of a loan given to the assessee. The assessee's shareholding in the creditor company was found to be 7.94%, which is less than the 10% threshold required under section 2(22)(e).
Held
The Tribunal held that the primary condition for invoking Section 2(22)(e), which requires the assessee to be a beneficial owner of shares holding more than 10% voting rights in the creditor company, was not satisfied. Therefore, the addition made by the Assessing Officer was not justified.
Key Issues
Whether the loan/advance received by the assessee from M/s Capital Control India Pvt. Ltd. constitutes deemed dividend under Section 2(22)(e) when the assessee's shareholding is less than 10%.
Sections Cited
143(3), 2(22)(e), 2(32)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Mumbai “D” Bench, Mumbai.
Before: Shri Satbeer Singh Godara (JM) & Shri Girish Agrawal (AM)
Per Satbeer Singh Godara (JM) :-
This Revenue’s appeal for A.Y. 2013-14, arises against the learned CIT(A)/National Faceless Appeal Centre “NFAC”, Delhi’s Din and order No. ITBA/NFAC/S/250/2023-24/10546986(1) dated 28.07.2023 in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”. Case called twice. None appears at assessee’s behest. Case file indicates that the registry has received back its RPAD notice dated 4.6.2024. The assessee is accordingly proceeded ex-parte.
Learned DR vehemently argued during the course of hearing that the learned CIT(A)/NFAC herein has erred in law and on facts in reversing the assessment findings making section 2(22)(e) deemed dividend addition of Rs. 310,25,993/- vide following lower appellate discussion:-
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“6. I have considered the submission of the appellant and perused the order of the Assessing Officer. The provisions of Section 2(22)(e) which is the bone of contention in this case is reproduced below:-
"2. In this Act, unless the context otherwise requires - (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...
[Explanation 3 - 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]"
Further, Section 2(32) of the Act defines 'substantial interest in a company' and this section is reproduced below:-
Section 2(32) of the Income Tax Act, 1961 states as under: "(32) person who has a substantial interest in the company", in relation to a company, means 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, carrying not less than twenty per cent of the voting power."
6.1 Thus, there are two limbs to this section for invoking the provisions of Section 2(22)(e) in case of any assessee.
Firstly, in case where any advance or loan is given to any of its shareholders who is the beneficial owner of shares holding not less than
10% voting power in the company or secondly where the loan or advance is given to any concern in which such shareholder is substantially interested.
6.2 The following facts are in-disputed in this case:-
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The shareholding of the appellant in M/s Capital Control India Pvt Ltd. (CCIPL), which has given the alleged loan or advance to the appellant is 0.14%.
The appellant is having 26% shares of M/s Chloro Control (India) Pvt. Ltd. The AO in the assessment order in para 5.1(c) has mentioned that the assessee is having more than 20% shareholding in M/s Chloro Control (India) Pvt. Ltd. This fact has also been reiterated in the summary in para 5.2(iii). The exact quantum of the shareholding is not mentioned by him. Based on the documents submitted during the appellate proceedings, which were also produced before the Assessing Officer, it is noticed that such shareholding is 26%.
M/s Chloro Control (India) Pvt. Ltd. is having 30% shareholding in M/s Capital Control India Pvt. Ltd.
Thus, it is clear that the appellant directly holds 0.14% shares of M/s Capital Control India Pvt. Ltd. and indirectly holds 7.8% of the voting rights in this company through its shareholding of M/s Chloro Control (India) Pvt. Ltd. and thus, the appellant is beneficial owner of shares having 7.94% of the voting rights in M/s Capital Control India Pvt. Ltd. In such eventuality, the appellant is not the beneficial owner of shares having more than 10% of the voting rights of the creditor company and thus, the first limb of provision of Section 2(22)(e) are not applicable. The Assessing Officer in its assessment order in Para 5.7(iv) has addresses this contention of the appellant and come to the conclusion that the appellant, is the beneficial owner of the loan received from M/s Capital Control India Pvt. Ltd., beneath the shares held by him in M/s Chloro Control (India) Pvt. Ltd. wherein he is having shareholding/voting power more than 10%. The basis on which he came to this conclusion is not mentioned. In the concluding para of assessment order i.e. para 5.12, the AO has concluded that the appellant is indirectly the beneficial shareholder of M/s Capital Control India Pvt. Ltd. and the assessee may not have 10% shareholding in M/s Capital Control India Pvt. Ltd. but on account of his shareholding in M/s Chloro Control (India) Pvt. Ltd. which is having 30% shareholding in M/s Capital Control India Pvt. Ltd., he becomes the beneficial owner of more than 10%. Based on this mathematical calculation, the basis of arriving at the finding that the appellant is beneficial owner of shares having more than 10% voting rights is flawed. This point has been addresses at length by the appellant in her submission dated 26.07.2023 and in my opinion bases on the facts and circumstances of the case and the documents submitted, the appellant is beneficial owner of shares of M/s Capital Control India Pvt. Ltd. to the extent c' having 7.94% of the voting rights.
Another issue raised by the Assessing Officer is that the loan/advance has been given to the appellant on behalf of 'M/s Chloro Control (India) Pvt. Ltd.'. This has been mentioned in para 5.1(d) of the assessment order. Further, in para 5.7(iv)(d) it is again mentioned that M/s Capital Control India Pvt. Ltd. gave the advance to the appellant on
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behalf of M/s Chloro Control (India) Pvt. Ltd. The basis for making this observation in the light of the fact that the alleged loan/advance was given by M/s Capital Control India Pvt. Ltd. to the appellant is not clear. To the contrary, the Assessing Officer has accepted in para 5.12 that the said loan/advance was given to the assessee by M/s Capital Control India Pvt. Ltd. and the same has been confirmed and accepted by him. Moreover, it is the finding of the Assessing Officer that the appellant was beneficial owner of shares having more than 10% of voting rights of M/s Capital Control India Pvt. Ltd. and the alleged loan/advance was given by M/s Capital Control India Pvt. Ltd. which triggered the applicability of Section 2(22)(e) in this case. In such circumstances, the observations of the AO that the alleged loan/advance was given by M/s Capital Control India Pvt. Ltd. on behalf of M/s Chloro Control (India) Pvt. Ltd. is without any basis and also contrary to his findings.
It is not the Assessing Officer's case that the second limb has been invoked in this case as the alleged loan/advance has been given by M/s Capital Control India Pvt. Ltd. to the appellant and not by M/s Chloro Control (India) Pvt. Ltd. to M/s Capital Control India Pvt. Ltd. Since the alleged loan/ advance has directly been given by M/s Capital Control India Pvt. Ltd. to the appellant, the second limb will not come into play in this case.
6.3 Thus, in view of the detailed discussions in this order, it is held that primary condition for the invoking of the provisions of Section 2(22)(e) i.e. the assessee being the beneficial owner of shares having more than 10% voting rights in the creditor company is not satisfied in this case and therefore, the addition made by the Assessing Officer is not justified and hence, deleted. The other issues i.e. whether the amount is a loan/advance or a trade transaction etc. are not being adjudicated upon as the primary condition for triggering the application of this deeming provision is not attracted.
Therefore, the ground of appeal no. 1 is allowed.”
Mrs. Nair next invited our attention to the Assessing Officer’s assessment discussion dated 16.3.2016 that the assessee was found to have obtained unsecured loans from M/s. Capital Controls India Pvt. Ltd. to the tune of Rs. 490,98,707/-in the relevant previous year followed by his stake holding therein exceeding 10%. Her case is that the Assessing Officer had rightly invoked the impugned deeming fiction of dividend(s) under section 2(22)(e) of the Act which deserves to be restored in the facts and circumstances of the case.
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We find no merit in the Revenue’s instance sole substantive grievance. This is for the precise reason that the learned CIT(A)’s above extracted lower appellate discussion has made it clear that the assessee-Shri Madhusudan Babubhai Kocha holds 7.94% shareholding only in M/s. Capital Controls India Pvt. Ltd. which is less than the threshold limit of 10% prescribed in section 2(22)(e) of the Act. This clinching fact has remained un-rebutted from the Revenue side. Faced with this situation, we adopt restrict interpretation as per CIT Vs. Dilip Kumar & Co. (2018) 9 SCC 1 (Supreme Court) to conclude that the learned Commissioner’s lower appellate findings deleting the deeming dividend addition herein deserve to be upheld. Order accordingly.
This Revenue’s appeal is dismissed in above terms. Order pronounced in the open court on 10th July, 2024.
Sd/- Sd/- (Girish Agrawal) (Satbeer Singh Godara) Accountant Member Judicial Member
Mumbai : 10.07.2024 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai. 6. Guard File. BY ORDER, //True Copy// (Assistant Registrar) PS ITAT, Mumbai