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Income Tax Appellate Tribunal, ‘C’ BENCH, BANGALORE
Before: SMT. ASHA VIJAYARAGHAVAN & SHRI INTURI RAMA RAO
IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, BANGALORE
BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER
ITA No.1284/Bang/2015 (Assessment year: 2011-12)
M/s.Suresh Enterprises Pvt.Ltd. Akshay Chabbi Corner, Akshay Centre, Gokul Road, Hubli. … Appellant PA No.AACCS4691 N Vs. Asst. Commissioner of Income-tax, Circle 3(1), Hubli. … Respondent
Appellant by : Shri S.Parthasarathi, Advocate Respondent by : Shri Sunil Kumar Agarwala, JCIT(DR)
Date of hearing : 23/06/2016 Date of pronouncement : 20/07/2016
O R D E R Per INTURI RAMA RAO, AM :
This is an appeal filed by the assessee directed against the order of the CIT(A), Hubli, dated 31/07/2015 for the assessment year 2011-12.
The assessee raised the following grounds of appeal:
“The order passed by the learned C I T (A) is against the facts of the case, erroneous, prejudiced and against the provisions of Section 2(22)(e) of the Income Tax Act, 1961
ITA No.1284/Bang/2015 Page 2 of 11 2. The CIT(A) order is against the facts of the case as mentioned in the Statement of Facts which has not taken into consideration the nature of relation between Shejawadkar Builders Pvt. Ltd., (Holding Company) and Suresh Enterprises Pvt. Limited (Subsidiary Company), the nature of the accounts and the Carry Forward Loss position of SHEJAWADKAR BUILDERS PVT. LTD. 3. The order passed by the learned C I T (A) is erroneous and prejudiced since the submissions made regarding the carry forward loss and re-casted Balance Sheets are not taken into consideration to ascertain the fact that, the SBPL is having the accumulated loss position. 4. As mentioned in page 2, of the Assessment Order; "Bare reading of the sections 2(22)(e) implies the following Any payment made by a private limited company in form of loan or advance in the below three cases can be taxed in the hands of recipient as deemed dividend to the extent the company possesses accumulated profits..." It is very clear from the above that, the company should have accumulated profit to treat the loans and advances as deemed dividend u/s 2(22)(e). It is evident from the Balance Sheet of Shejawadkar Builders Pvt Ltd, that the Company is not having accumulated profit as per the provisions u/s 2(22)(e). As per the Balance Sheet as on 31/03/2011, the accumulated profit before depreciation is Rs 36,47,236/- as on 31/03/2011. After claiming accumulated depreciation, the company has suffered loss. The company has filed a loss return with carry forward loss of Rs 2,58,15,749/-. Depreciation is an item to be excluded from the accumulated profits before arriving at the profits to be charged u/s 2(22)(e). The additions made to the extent of Rs 36,47,236/- is against the provisions of the Income Tax Act, 1961.
The word "Dividend" u/s 2(22)(e) is after providing for depreciation as mentioned below: i) General Sub-clause (e) applies when distribution of payment referred to therein are connected with accumulated profits. The undistributed income when accumulated from year to year, generates what is known as "accumulated profit". Accumulated profit shall include all profit of the company till
ITA No.1284/Bang/2015 Page 3 of 11 the date of distribution or payment referred to sub- clause (e) i) Current Profits Current Profits are included in 'Accumulated profits" in section 2(22)(e) of IT. Act, 1961. The expression "Accumulated Profits' was defined in the 1961 Act so as to include current profit upto the date of distribution or payment. ii) Accumulated Profits-How to be Computed The phrase accumulated profits" does not mean aggregate of assessed profits but commercial profits. If certain disbursement have been disallowed in the assessment proceedings but the expenditure had in fact been incurred, they should be excluded from accumulated profits. In computing commercial profit, all the disbursement made and expenditure incurred for the purpose of business should be taken into accounts. The following are the items which are to be excluded in computing accumulated profits.
a) Provision for taxation and dividend b) Depreciation c) Difference between depreciation calculated at the rate given under the IT. Act and rate adopted in books. d) Balance in charge e) Capital gains not chargeable to tax
The Honourable C I T (A) has not taken into consideration the meaning of "Dividend" as explained above and hence the order passed by C I T (A) is against the provisions of Section 2(22)(e)
We pray Your Honour to delete the additions made on account of Deemed Dividend u/s 2(22)(e) in the interest of the natural justice.
PRAYER FOR STAY The appellant prays the Honourable Appellate Tribunal to stay the proceedings of collection of taxes till our case is heard and disposed off by the Honourable Appellate Tribunal in view of the financial hardship faced by the Company. PRAYER
The Appellant prays the Honourable Appellate Tribunal to permit the submission of additional Grounds of Appeal and facts at the time of hearing. Your Honour is earnestly requested to delete
ITA No.1284/Bang/2015 Page 4 of 11 the additions made by the Learned C I T (A) in the interest of the provisions of the Income Tax Act, 1961 and natural justice.”
Briefly facts of the case are the assessee is a company duly incorporated under the provisions of the Companies Act,1956. It is engaged in the business of real estate and construction. Return of income for the assessment year 2011-12 was filed on 24/09/2011 declaring total income of Rs.83,80,670/- and the same was revised on 5th May 2012 at a total income of Rs.74,30,500/-. After processing return of income u/s 143(1) of the Income-tax Act,1961 [‘the Act’ for short], the case was taken up for scrutiny assessment and the assessment was completed u/s 143(3) of the Act vide ode dated 30th March 2014 at a total income of Rs.1,11,23,740/-. While doing so, the AO made addition of Rs.36,47,236/- on account of deemed dividend alleging that the assessee has received unsecured loans from following parties:
i. Shejwadkar Builders Pvt.Ltd. ... Rs.5,09,64,735/- ii. Shejwadkar Construction Co. Ltd. ... Rs.25,25,000/- The AO was of the opinion that the companies which advanced loans to assessee-company had a substantial interest in the assessee-company and therefore, the loans advanced by the said company constituted deemed dividend in the hands of the assessee-company, hence, brought to tax.
ITA No.1284/Bang/2015 Page 5 of 11 4. Being aggrieved, an appeal was filed before the CIT(A) who dismissed the same. The only contention raised before the CIT(A) was that there was no accumulated profits once unabsorbed depreciation is set off. The legal contention that provisions of section 2(22)(e) cannot be invoked as the assessee- company is not a shareholder in the said companies was neither advanced nor adjudicated by the CIT(A).
Being aggrieved, assessee is in appeal before us in the present appeal.
5.1 Learned counsel for assessee submitted that the provisions of sec.2(22)(e) cannot be invoked in the present case as the assessee-company which received loans and advances from the said companies is not a shareholder in the said companies viz., (i) Shejwadkar Builders Pvt. Ltd. and (ii) Shejwadkar Construction Co. Ltd. Our attention was drawn to the provisions of sec.2(22)(e) in this connection.
5.2 On the other hand, learned Departmental Representative relied on the orders of the lower authorities.
We heard the rival submissions and perused material on record. The only issue in the present appeal is whether in the given facts and circumstances, amount received by the assessee- company from Shejwadkar Builders Pvt. Ltd. and Shejwadkar Construction Co. Ltd. constitutes deemed dividend in the hands of
ITA No.1284/Bang/2015 Page 6 of 11 the assessee-company. There is no dispute about receipt of money from Shejwadkar Builders Pvt.Ltd. and Shejwadkar Construction Co. Ltd. The provisions of sec.2(22)(e) are reproduced below: “2(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) 5 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; But "dividend" does not include- (i) a distribution made in accordance with sub- clause (c) or sub- clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets; (ia) a distribution made in accordance with sub- clause (c) or sub- clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964 , and before the 1st day of April,1965; (ii) any advance or loan made to a shareholder 3 or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company;
ITA No.1284/Bang/2015 Page 7 of 11 (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub- clause (e), to the extent to which it is so set off. (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956); (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company) Explanation 1.- The expression" accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946 , or after the 31st day of March, 1948 , and before the 1st day of April, 1956. Explanation 2.- The expression "accumulated profits" in sub- clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub- clauses, and in subclause (c) shall include all profits of the company up to the. date of liquidation, 4but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place]. 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
ITA No.1284/Bang/2015 Page 8 of 11 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 provisions, it is clear that for invoking the provisions of section 2(22)(e), sine qua non condition is recipient of loan should be a shareholder in the companies from which loans/advances are received. From the assessment order, the share holding of the three companies was mentioned which is extracted below:
From the above details, it is clear that the assessee- company i.e. Suresh Enterprises, Pvt. Ltd., is not a shareholder in Shejawadkar Builders Pvt. Ltd. Therefore, the essential condition for invoking provisions of sec.2(22)(e) is not fulfilled in this case.
ITA No.1284/Bang/2015 Page 9 of 11 7. The co-ordinate bench Delhi in ITA No.6302/Del/2013 dated 10/06/2015 in the case of IAG Promoters and Developers Pvt. Ltd., Vs. ACIT , to which one of us is the author, held as follows:
“5. We have heard the rival submissions and perused the material on record. Undisputedly, the appellant is not a shareholder of M/s Countrywide Promoters Pvt. Ltd. It is trite law that the provisions of Section 2(22)(e) have no application to non-registered shareholders. The Hon'ble Apex Court in the case of CIT Vs. C.P. Sarathy Mudaliar (1972) 83 ITR 170 (SC) while construing the provisions of Section 2(6A)(e) of the Act, 1922 which are in pari materia with the provisions of Section 2(22)(e) of the Income-tax Act, 1961, held that the provisions governing the deemed dividend can be made applicable only in the hands of the registered shareholders. Since, admittedly, in the present case, the appellant is not a shareholder of M/s Countrywide Promoters Pvt. Ltd. the amount of Rs. 1,73,262/- cannot be taxed in the hands of the appellant company. Hence the appeal filed by the assessee is allowed. ” The Hon’ble jurisdictional High Court in the case of Bagmane Constructions (P) Ltd. vs. CIT (2015) (277 CTR 338)(Kar) held that in a case where loans are advanced/granted to a concern which falls under clause (e) of sub-sec.(22) of sec.2, tax is leviable as deemed dividend only in the hands of the shareholder and not in the hands of the concern. The relevant part is extracted below: “30. It was also contended on behalf of the revenue that having regard to the plain words used in clause (e) 'to any concern', when the amount is paid or when any payment is made to a concern, the tax is levied on the concern and not on the shareholders. As far as this question is concerned, this Court following the judgment of the Bombay High Court in the case of
ITA No.1284/Bang/2015 Page 10 of 11 Commissioner of Income Tax vs Universal Medicare (P) Limited reported in 324 ITR 263 has categorically held that when any payment is made by a company to any concern, which falls under clause (e), the tax is leviable on the shareholder only and not on the concern. We respectfully agree with the aforesaid judgment and we do not see any justification to take another view of this matter. Therefore, the finding recorded by the Tribunal that, these advances made by the BDPL to the sister concern as well as to its shareholder do not constitute deemed dividend under section 2(22)(e) of the Act, is legal and valid and do not call for any interference. ”
Respectfully following the above decision, we hold that deemed dividend cannot be taxed in the hands of the assessee-company as the assessee is not a shareholder in the company Shejawadkar Builders Pvt. Ltd from which loans were received. However, we add here that it is open to the department to tax it in the hands of the shareholder by initiating appropriate action by the process known to law.
Before we part with, we must deal with the contention raised by the learned Departmental Representative that, the recipient of loan should be a shareholder in the companies from which loans have been received, was not taken before the lower authorities. Therefore, this issue cannot be adjudicated by this Tribunal. This contention cannot be accepted as it is purely a question of law. Fact that the assessee is not a shareholder in the company Shejwadkar Builders Pvt. Ltd.,is borne out of the assessment order itself. Therefore, the contention raised by the learned DR is rejected.
ITA No.1284/Bang/2015 Page 11 of 11 9. In the result, the appeal filed by the assessee-company is allowed.
Order pronounced in the open court on 20th July, 2016
sd/- sd/- (ASHA VIJAYARAGHAVAN) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Place : Bangalore D a t e d : 20/07/2016 srinivasulu, sps Copy to : 1 Appellant 2 Respondent 3 CIT(A)-II Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order Assistant Registrar Income-tax Appellate Tribunal Bangalore