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Income Tax Appellate Tribunal, “B” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Dr.Arjun Lal Saini, AM]
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : KOLKATA [Before Hon’ble Sri N.V.Vasudevan, JM & Dr.Arjun Lal Saini, AM] I.T.A Nos.1461 & 1462 /Kol/2015 Assessment Years : 2008-09 & 2011-12 I.T.O. Ward – 12 (1) vs.- M/s J.K.M.Investment (P)Ltd. Kolkata Kolkata. [PAN : AABCJ 2724 L] (Respondent) (Appellant) For the Appellant : Shri S.Dasgupta, Addl. CIT(DR) For the Respondent : Shri Ankit Jalan, A.R.
Date of Hearing : 04.12.2017. Date of Pronouncement : 08.12.2017. ORDER Per N.V.Vasudevan, JM ITA Nos.1461 & 1462/Kol/2015 are appeals filed by the revenue against two different orders of both dated 16.09.2015 of CIT(A)-IV, Kolkata relating to A.Y.2008- 09 and 2011-12. First we take up for consideration the appeal for A.Y.2008-09. The only issue that arises for consideration in this appeal is as to whether CIT(A) was justified in deleting the addition of Rs.1,61,91,000/- added by the AO as deemed dividend in the hands of the assessee by invoking the provision of section 2(22)(e) of the Income Tax Act, 1961 (Act).
The undisputed facts are that the assessee had received loan from M/s J.K.M.Overseas (P) Ltd., of Rs.1,61,91,000/-. The AO was of the view the said amount received as loan should be treated as deemed dividend u/s. 2(22)(e) of the Income Tax Act, 1961 (Act). The assessee submitted that it was not a shareholder in M/s. J.K.M.Overseas (P) Ltd., and consequently the amount could not be held to be deemed dividend by applying the provisions of section 2(22)(e) of the Act.
2 ITA Nos.1461 & 1462/Kol/2015 M/s. J.K.M.Investment (P)Ltd. A.Y.2008-09 & 2011-12 3. The AO however, was of the view that though the Assessee was not a shareholder in M/s. J.K.M.Overseas (P) Ltd., one Smt.Indu Modi was a common shareholder in both the Assessee and M/s. J.K.M.Overseas (P) Ltd., holding 54% and 76.5% paid up share capital respectively in the aforesaid two companies and therefore the provisions of Sec.2(22)( e) of the Act would be attracted. The AO ultimately passed an order treating the loan in question as a deemed dividend in the hands of the Assessee.
On appeal by the Assessee the CIT(A) deleted the addition made by the AO accepting the contention of the Assessee that the assessee company was not a shareholder in M/s. J.K.M.Overseas (P) Ltd., and deemed dividend cannot be taxed in the hands of a non shareholder as held by ITAT Kolkata in the case of DCIT Vs. Madhusudan Investment & Trading (P) Ltd., (2011) 15 taxmann.com 252 (kol).
Aggrieved by the order of the CIT(A), the revenue has preferred the present appeal before the Tribunal.
We have heard the submission of the learned DR who relied on the order of the AO. The learned counsel for the Assessee relied on the order of the CIT(A) and filed before us copy of the order of the Hon’ble High Court of Calcutta, in G.A.No.2394 of 2014 dated 21.8.2014 wherein the Hon’ble High Court dismissed the appeal preferred by the Revenue against the order of the Tribunal taking similar view in ITA No.512/Kol/2012 dated 6.5.2014. He also placed reliance on the decision of Hon’ble Delhi High Court in the case of CIT Vs. Ankitech Pvt.Ltd. & others 340 ITR 14 (Del.) taking a view that deemed dividend cannot be taxed in the hands of a non shareholder. Reliance was placed on the fact that the Hon’ble Supreme Court in CIT Vs. Madhur Housing and Development company in Civil Appeal No.3961 of 2013 judgement dated 5.10.2017, wherein the Hon’ble Supreme Court confirmed the view taken by the
3 ITA Nos.1461 & 1462/Kol/2015 M/s. J.K.M.Investment (P)Ltd. A.Y.2008-09 & 2011-12 Hon’ble Delhi High Court in the case of CIT Vs. Ankitech Pvt.Ltd. & others 340 ITR 14 (Del.).
We have heard the submissions of the learned counsel for the Assessee. The provisions of Sec.2(22)(e) of the Act, reads as follows: “(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 31-5-1987, 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 to Section 2(22)(e) is as follows: “Explanation-3: For the purpose 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 percent of the income of such concern;”
7.1. Section 2(32) defines the expression “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 percent of the voting power.
An analysis of the above provisions shows that there are three limbs to 7.2. Sec.2(22)(e) which are 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 31-5-1987, by way of advance or loan 3
4 ITA Nos.1461 & 1462/Kol/2015 M/s. J.K.M.Investment (P)Ltd. A.Y.2008-09 & 2011-12 First limb (a) 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, Second limb (b) 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) Third limb (c) 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.”
7.3. In the present appeal we are concerned with the second limb of Sec.2(22)(e) of the Act, viz., “to any concern in which such shareholder is a member or a partner and in which he has a substantial interest”. The following conditions are required to be satisfied for application of the above category of payment to be regarded as Dividend. They are:- (a) There must be a payment to a concern by a company. (b) A person must be Shareholder of the company being a registered holder and 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. This is because of the expression “Such Shareholder” found in the relevant provision. This expression only refers to the shareholder referred to in the earlier part of Sec.2(22)(e) viz., a registered and a beneficial holder of shares holding 10% voting power. (c)The very same person referred to in (b) above must also be a member or a partner in the concern holding substantial interest in the concern viz., when the concern is not a company, he must at any time during the previous year, be beneficially entitled to not less than twenty percent of the income of such concern; and where the concern is a company he must be the 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 percent of the voting power (d) If the above conditions are satisfied then the payment by the company to the concern will be dividend. 7.4. The Special Bench of ITAT, Mumbai, in the case of Bhaumik Color Labs ITA 5030/M/04, 118 ITD 1 (SB) (Mum), considered the question Whether deemed dividend 4
5 ITA Nos.1461 & 1462/Kol/2015 M/s. J.K.M.Investment (P)Ltd. A.Y.2008-09 & 2011-12 u/s. 2(22)(e) of the Income Tax Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender? The Special Bench held that deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. The Special Bench on the above issue has observed as follows:- “30. At the outset it has to be mentioned that provisions of Sec.2(22)(e) which brought in a new category of payment which was to be considered as dividend as introduced by the Finance Act 1987 w.e.f.1-4-88 viz., payment by a company “to any concern in which such shareholder is a member or a partner and in which he has a substantial interest” do not say as to in whose hands the dividend has to be brought to tax, whether in the hands of the “concern” or the “shareholder”. We have already seen the divergent views on this issue which have been referred to in the earlier part of this order.
The above provisions were subject matter of consideration before the Hon’ble Rajasthan High Court in the case of CIT Vs. Hotel Hilltop. 217 CTR 527(Raj). The facts of the case before the Hon’ble Court were as follows. The Assessee was one M/S.Hotel Hilltop a partnership firm. This firm received an advance of Rs.10 lacs from a company M/S.Hilltop palace Hotels (P) Ltd. The shareholding pattern of M/S.Hillltop Palace Hotels (P) Ltd., was as follows:
Shri Roop Kumar Khurana : 23.33% 2. Smt.Saroj Khurana : 4.67% 3. Vikas Khurana : 22% 4. Deshbandhu Khurana: 25% 5. Shri.Rajiv Khurana : 25%
The constitution of the firm Hotel Hill Top was as follows: 1. Shri Roop Kumar Khurana: 45% 2. Shri.Deshbandhu Khurana: 55%
The AO assessed the sum of Rs.10 lacs as deemed dividend u/s.2(22)(e) of the Act in the hands of the firm because the two partners of M/S.Hotel Hill Top were holding shares by which they had 10% voting power in M/S.Hill Top Palace Hotels (P) Ltd. They were also entitled to 20% of the income of the firm M/S.Hotel Hill Top. Therefore the loan by M/S.Hill Top Palace Hotels (P) Ltd. To the firm M/S.Hotel Hill Top was treated as deemed dividend in the hands of 5
6 ITA Nos.1461 & 1462/Kol/2015 M/s. J.K.M.Investment (P)Ltd. A.Y.2008-09 & 2011-12 M/S.Hotel Hill Top, the firm under the Second limb of Sec.2(22)(e) of the Act. The CIT(A) held that since the firm was not the shareholder of the company the assessment as deemed dividend in the hands of the firm was not correct. The order of the CIT(A) was confirmed by the Tribunal. On Revenue’s appeal before the Hon’ble High Court, the following question of law was framed for consideration:-
“Whether on the facts and in the circumstances of the case and in law the learned Tribunal was justified in upholding the order of learned CIT(A) deleting the addition of Rs.10 lacs as deemed dividend under Section 2(22)(e) of the IT Act? ”
The Hon’ble Court held as follows:-
“ The important aspect, being the requirement of section 2(22)(e) is, that ‘the payment may be made to any concern, in which such shareholder is a member, or the partner, and in which he has substantial interest, or any payment by any such company, on behalf or for the individual benefit of any such shareholder ……. “ Thus, the substance of the requirement is that the payment should be made on behalf of or for the individual benefit of any such shareholder, obviously, the provision is intended to attract the liability of tax on the person, on whose behalf, or for whose individual benefit, the amount is pad by the company, whether to the shareholder, or to the concerned firm. In which event, it would fall within the expression ‘deemed dividend’. Obviously, income from dividend, is taxable as income from the other sources under section 56, and in the very nature of things the income has to be of the person earning the income. The assessee in the present case is not shown to be one of the persons, being shareholder. Of course, the two individuals being R and D. are the common persons, holding more than requisite amount of shareholding and are having requisite interest, in the firm, but then, thereby the deemed dividend would not be deemed dividend in the hands of the firm, rather it would obviously be deemed dividend in the hands of the individuals, on whose behalf, or on whose individual benefit, being such shareholder, the amount is paid by the company to the concern. Thus, the significant requirement of section 2(22)(e) is not shown to exist. The liability of tax, as deemed divided, could be attracted in the hands of the individuals, being the shareholders, and not in the hands of the firm.”
The aforesaid decision of the Hon’ble Rajasthan High Court which is the only decision of High Court, should be sufficient to answer question No.2 which has been referred to the Special Bench by holding that deemed dividend can be 6
7 ITA Nos.1461 & 1462/Kol/2015 M/s. J.K.M.Investment (P)Ltd. A.Y.2008-09 & 2011-12 assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. The argument of the learned D.R. that the Hon’ble Rajasthan High Court did not deal with the second limb of Sec.2(22)(e) of the Act is not correct.” 7.5. The Special Bench further held as follows:-
“34. We are of the view that the provisions of Sec.2(22)(e) does not spell out as to whether the income has to be taxed in the hands of the shareholder or the concern(non-shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of Sec.2(22)(e) of the Act.
The intention behind enacting provisions of section 2(22)(e) are that closely held companies (i.e. companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would became taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions such payment by the company is treated as dividend. The intention behind the provisions of section 2(22)(e) is to tax dividend in the hands of shareholder. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which it’s shareholder has substantial interest, is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern.
The basis of bringing in the amendment to Sec.2(22)(e) of the Act by the Finance Act, 1987 w.e.f 1-4-88 is to ensure that persons who control the affairs of a company as well as that of a firm can have the payment made to a concern from the company and the person who can control the affairs of the concern can drawn the same from the concern instead of the company directly making payment to the shareholder as dividend. The source of power to control the affairs of the company and the concern is the basis on which these provisions have been made. It is therefore proper to construe those provisions as contemplating a charge to tax in the hands of the shareholder and not in the hands of a non-shareholder viz., concern. A loan or advance received by a concern is not in the nature of income. In other words there is a deemed accrual of income even u/s.5(1)(b) in the hands of the shareholder only and not in the 7
8 ITA Nos.1461 & 1462/Kol/2015 M/s. J.K.M.Investment (P)Ltd. A.Y.2008-09 & 2011-12 hands of the payee viz., non-shareholder (Concern). Sec.5(1)(a) contemplates that the receipt or deemed receipt should be in the nature of income. Therefore the deeming fiction can be applied only in the hands of the shareholder and not the non-shareholder viz., the concern.
The definition of Dividend U/s.2(22)(e) of the Act is an inclusive definition. Such inclusive definition enlarges the meaning of the term “Dividend” according to its ordinary and natural meaning to include even a loan or advance. Any loan or advance cannot be dividend according to its ordinary and natural meaning. The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word “Dividend” is extended to loans and advances to a shareholder or to a concern in which a shareholder is substantially interested deeming them as Dividend in the hands of a shareholder the ordinary and natural meaning of the word “Dividend” is altered. To this extent the definition of the term “Dividend can be said to operate. If the definition of “Dividend” is extended to a loan or advance to a non shareholder the ordinary and natural meaning of the word dividend is taken away. In the light of the intention behind the provisions of Sec.2(22)(e) and in the absence of indication in Sec.2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a non-shareholder cannot be taxed as Deemed Dividend in the hands of a non-shareholder.”
7.6. The aforesaid view has since been approved in several decisions rendered by Hon’ble High Court of Bombay and Delhi in the case of CIT Vs. Universal Medicare Pvt. Ltd., 324 ITR 263 (Bom) and CIT Vs. Ankitech Pvt.Ltd. & others 340 ITR 14 (Del.). The Hon’ble Supreme Court in CIT Vs. Madhur Housing and Development company in Civil Appeal No.3961 of 2013 judgment dated 5.10.2017, confirmed the view taken by the Hon’ble Delhi High Court in the case of CIT Vs. Ankitech Pvt.Ltd. & others 340 ITR 14 (Del.). Since the Assessee in the present case is not a shareholder in the lender company, we are of the view that the above decision is squarely applicable to the facts of the Assessee’s case.
7.7. In view of the aforesaid decision, we are of the view that the order of CIT(A) is just and proper and calls for no interference. We therefore uphold the order of the
9 ITA Nos.1461 & 1462/Kol/2015 M/s. J.K.M.Investment (P)Ltd. A.Y.2008-09 & 2011-12 CIT(A) and dismiss the appeal by the Revenue for AY 2008-09 in ITA No.1461/Kol/2015. ITA No.1462/Kol/2015 A.Y.2011-12 8. Grounds No.1 to 5 raised by the revenue in this appeal is identical to ground nos. 1 to 5 raised by the revenue in A.Y.2008-09. The issue is with regard to taxing a sum of Rs.1,17,50,000/- as deemed dividend in the hands of the assessee company u/s 2(22)(e) of the Act. The facts are identical to the facts as it prevail in A.Y.2008-09. While deciding the identical issue we have already held that the action of CIT(A) in deleting the addition made of deemed dividend in the hands of the assessee was rightly deleted by CIT(A). For the reasons given on the same issue for A.Y.2008-09, we find no merits in ground no.1 to 5 raised by the revenue.
Ground No.6 raised by the revenue reads as follows :- “6. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred by ignoring that dividend income falls under the head, of income 'Income from Other Source' and the AO rightly put the Dividend Income under the appropriate head of income and rightly computed the disallowance u/s. 14A of the Act read with Rule 8D.”
The Assessee is a company engaged in the construction business. The assessee earned dividend of Rs.66,354/- from its investment in shares and mutual funds. The assessee claimed the said income as business income and offered it to tax, though the dividend income in question was exempt u/s 10 of the Act. The assesee had not claimed any exemption. The AO was of the view that the dividend in question was exempt u/s 10 of the Act and therefore the assesee ought not to have offered the said income to tax and that the assessee should have calculated expenses incurred in earning the exempt income and disallowed such expenses while computing the total income. The AO computed the disallowance in terms of Rule 8D r.w.s. 14A of the Act of Rs.1,34,008/-. He excluded the dividend income from the total income and added a sum of Rs.1,34,008/- to the total income being disallowance of expenses u/s 14A of the Act. 9
10 ITA Nos.1461 & 1462/Kol/2015 M/s. J.K.M.Investment (P)Ltd. A.Y.2008-09 & 2011-12 11. Before CIT(A) the assessee firstly pointed out that no interest expenses whatsoever was incurred in earning the dividend income and in this regard pointed out that no interest expenses has been claimed in the profit and loss account. Secondly, the assessee pointed out that the Hon’ble Punjab and Haryana High Court in the case of CIT vs Winsome Textiles Industries Ltd. 319 ITR 204 (P&H) has taken the view that when the assessee does not claim exemption section 14A will not have any application.
CIT(A) deleted the addition made by the AO accepting the contention of the assessee. The following are the relevant observations : “6.2. I have carefully considered the submission of the appellant in the light of the AO's action. I find that that the AO observed that the dividend income of Rs.66,354/- -was offered for. taxation but went on to calculate the disallowable expenses against this amount u/s 14A of the Act r. w. Rule 8D of the I. T. Rules in an amount of Rs.1,34,008/-. I find the AO 's action to be on an erroneous plane in as much as the dividend Income had been offered for taxation and for which there was no requirement for calculating any disallowable expenses on this account. Section 14A of the Act talks of disallowance of expenses attributable to exempt income but in this case the impugned income was not claimed as exempt. Disallowance u/s 14A requires a finding of incurring of expenditure and if it is found that for earning exempted income no expenditure has been incurred, disallowance u/s 14A cannot stand. Viewed from any angle, the case of the appellant does not come within the ambit of section 14A r. w. Rule 80 for which the addition made by the AO on this count amounting to Rs.1,34,008/- is directed to be deleted.”
Aggrieved by the order of CIT(A) the revenue has raised ground no.6 before the Tribunal.
We have heard the ld. DR, who relied on the order of AO. The ld. Counsel for the assessee reiterated the submissions made before CIT(A) and the order of CIT(A).
We have heard the rival submissions. It is clear from a perusal of profit and loss account of the assessee that there was no interest expenses which was claimed as 10
11 ITA Nos.1461 & 1462/Kol/2015 M/s. J.K.M.Investment (P)Ltd. A.Y.2008-09 & 2011-12 deduction. Therefore no disallowance of interest expenses can be made. A perusal of profit and loss account shows that assessee has incurred office and administrative expenses of Rs.7,46,512/-. The details of this expenses are given in Schedule-15 to the schedule to the profit and loss account. None of the expenses debited in the profit and loss account can be attributed to the activity of earning tax free income. The details of the office and administrative expenses are as follows :-
The AO has not given the basis on which he arrived at the disallowance u/s 14A of the Act. In the absence of the basis of the disallowance by the AO we are of the view that the addition made by the AO was rightly deleted. Ground No.6 is accordingly dismissed. 17. Ground No.7 raised by the revenue reads as follows :- “7. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred by giving relief to the assessee on the issue of addition of receipt of undisclosed insurance commission whereas, he did not raise any objection to the correction of ITS details available with the department regarding receipt of the said commission income.”
12 ITA Nos.1461 & 1462/Kol/2015 M/s. J.K.M.Investment (P)Ltd. A.Y.2008-09 & 2011-12 18. The AO on scrutiny of ITS details was of the view that the assesee has received insurance commission of Rs.20,191/- on which TDS of Rs.2191/- u/s 194D of the Act was deducted. The AO noticed that the assessee has neither offered commission income to tax nor claimed credit for TDS. The AO therefore treated the sum of Rs.20,191/- as undisclosed income of the assessee and brought it to tax.
Before CIT(A) the assessee pointed out that the assessee did not receive any such commission income and disputed the basis of conclusion by AO namely the ITS details. CIT(A) accepted the contention of the assessee and held that the AO has not brought any material on record to show that the assessee has received commission income. Accordingly he deleted the addition made by AO.
Aggrieved by the order of CIT(A) the revenue has raised ground no.7 before the Tribunal.
201 We have heard the rival submissions. The ld. DR relied on the order of AO. The ld. Counsel for the assessee relied on the order of CIT(A).
We have considered the rival submissions and are of the view that order of CIT(A) on this issue does not call for any interference. The information received by the AO was a general information and based on TDS returns filed by various persons at various places. The AO could not co-relate the details of the persons from whom the assessee is stated to have received commission. In such circumstances the very basis of the conclusion by the AO that the assessee received insurance commission is devoid of merit. In our view the CIT(A) rightly deleted the addition made by AO as it was not based on any material brought on record. Ground No.7 is accordingly dismissed.
13 ITA Nos.1461 & 1462/Kol/2015 M/s. J.K.M.Investment (P)Ltd. A.Y.2008-09 & 2011-12 23. In the result both the appeals by the revenue are dismissed.
Order pronounced in the Court on 08.12.2017.
Sd/- Sd/- [Dr.A.L.Saini] [ N.V.Vasudevan ] Accountant Member Judicial Member
Dated : 08.12.2017. [RG Sr.PS]
Copy of the order forwarded to:
1.M/s. J.K.M.Investment Pvt. Ltd., 36, Bibhuti Bandyapadhyay Sarani, Kolkata-700 198. 2. I.T.O., Ward-12 (1),, Kolkata. 3. C.I.T. (A)-4, Kolkata. 4. C.I.T.-4, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.