SARDAR MADAN SINGH BHARARA,MUMBAI vs. JCIT (OSD) RG 8(1), MUMBAI

आयकर अपील सं/ & 1563/Mum/2010 (िनधा�रण वष� / Assessment Year: 2006-07 & 2008-09) बनाम/ Sardar Madan Singh Bharara Joint Commissioner of Santosh Niwas, Phiroz Road, Income Tax Range 8(1) Vs. Santacruz (W), Aayakar Bhavan, Mumbai – 400054 Mumbai - 400020 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AABPB9330M (अपीलाथ� /Appellant) (��थ� / Respondent) .. Assessee by: None Revenue by: Shri Saurabh Kumar Rai सुनवाई की तारीख / Date of Hearing: 30.11.2016 घोषणा की तारीख /Date of Pronouncement: 23.02.2017 आदेश / O R D E R PER AMARJIT SINGH, JM:

The assessee has filed the above mentioned appeals against the order dated 12.01.2012 passed by the Commissioner of Income Tax (Appeals) 16, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y.2006-07 & 2008-09.

ITA 1562/M/2012:-

1. The learned Commissioner of Income Tax has erred in confirming the order passed by the Joint Commissioner of Income Tax without considering the circumstances of the case in judicious manner.

“In this case, the assessee, Shri Madansingh Bharara, filed return of income for the A.Y.2006-07 on 29.07.2006, declaring total income at Rs.19,46,726/-. The return of income was processed u/s.143(1) of the Income Tax Act, 1961. Subsequently, no scrutiny assessment has been done in this case.

It is seen that in the Assessment Years 2006-07 and 2008-09, Shri Madansingh Bharara, who is assessed in this charge, is the registered & beneficial shareholder, having more than 20% share, in the following private limited companies:

Sr. Name of the company Asst. Assessed %age of No. Year with shareholding 1. M/s.Om Sidhivinayak Creations Pvt. 2006-07 ITO- 90% Ltd. 8(2)(4), Mumbai 2. M/s. Gazebo Developers Pvt. Ltd. 2008-09 DCIT- 98% 8(1), Mumbai &1563/M/2012 A.Y.2006-07 & 2008-09 It is further seen that M/s. Gazebo Developers Pvt. Ltd., which is assessed in this charge, gave loans/advances of Rs.37,50,000/- to M/s. Om Sidhivinayak Creations Pvt. Ltd., which is assessed with ITO 8(2)(4), Mumbai. Hence, in the case of M/s. Om Sidhivinayak Creations Pvt. Ltd. for A.Y.2006-07, the ITO 8(2)(4), Mumbai added as sum of Rs.37,50,000/- to the total income of M/s. Om Sidhivinayak Creations Pvt. Ltd., as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.

Aggrieved, M/s. Om Sidhivinayak Crations Pvt. Ltd., filed an appeal before the Ld. CIT(A)-17, Mumbai. The Ld. CIT(A)-17, Mumbai vide his order dated 25.02.2010 deleted the addition made by the Assessing Officer u/s.2(22)(e), following the decision of the Hon’ble ITAT, Mumbai in the case of M/s. Bhaumik Colour Pvt. Ltd. The Ld. CIT(A), therefore, held that as per the said decision of the Hon’ble ITAT, Mumbai, deemed dividend u/s.2(22)(e) can only be treated in the hands of registered and beneficial shareholder of the lender company and not in the hands of the borrowing company, in which such shareholder is a member or a partner having substantial interest. &1563/M/2012 A.Y.2006-07 & 2008-09 Shri Madanshingh Bharara, is registered and beneficial shareholder of Gazebo Developers Pvt. Ltd. (which is the lender company in this case), having more than 20% shareholding, as stated above. Since, in the case of Mandansingh Bharara, no scrutiny assessment has been done, a sum of Rs.37,50,000/- u/s.2(22)(e) has remained to be added to his total income.

In view of the above, I have reasons to believe that income of Rs.37,50,000/- u/s.2(22)(e) has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961.”

3. The assessee also filed the reply by virtue of letter dated 16.11.2011, thereafter, the Assessing Officer completed the assessment by making the addition u/s.2(22)(e) of the Act to the tune of Rs.37,50,000/-. Revised total income was assessed to the tune of Rs.56,96,730/-. Subsequently the assessee filed an appeal before the CIT(A) who dismissed the appeal of the assessee, therefore the assessee has filed the present appeal before us.

ISSUE NO.1:-

“2.3.1 I have carefully considered the contention of the appellant and also carefully gone through the documents available on record. Before, I discuss the law position in this regard, it would be prudent to take note of the provision of s. 2(22)(e) of the Act. It reads as under:

(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 May, 1987, by way of advance or loan to a, 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 &1563/M/2012 A.Y.2006-07 & 2008-09 case possesses accumulated profits; but dividend' does not include - (i) a distribution made in accordance with sub-cl. (c) or sub-cl. (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-cl. (c) or sub-cl. (d) insofar as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st March, 1964, (and before the 1st April, 1965)

(ii) any advance or loan made to a shareholder 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; (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-cl. (e), to the extent to which it is so set off; &1563/M/2012 A.Y.2006-07 & 2008-09 (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of s. 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.

2.3.2. The new category of payment which was considered as dividend introduced by the Finance Act, 1987 w.e.f. 1st April, 1988 by the second limb of s. 2(22)(e) is payment to any concern in which such shareholder is a member or a partner and in which he has a substantial interest. For the purposes of these 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 a 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 &1563/M/2012 A.Y.2006-07 & 2008-09 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 s. 2(22)(e) viz., a registered and a beneficial holder of shares holding 10 per cent voting power. The Hon'hle Rajasthan High Court in the case of Union of India vs. Wazir Singh, while dealing with an expression 'no such application' in the context of r. 97 of the Rajasthan High Court Rules, 1952 has held as follows:

Generally the word such' refers only to previously indicated, characterized or specified. ' Sc1' is an adjective meaning, the one previously indicated or refers only to something which has been said before. The Hon'ble Allahabad High Court in the case of Mohan Lal & Anr. vs. Grain Chambers Ltd. AIR 1959 All 279 has held as follows:

In fact, it appears to us that the word 'such' is used before a noun in a latter part of a sentence, the proper construction in the English language is to hold that the same noun is being used after the word 'such with all its characteristics which might have been indicated earlier in the same sentence.

&1563/M/2012 A.Y.2006-07 & 2008-09 (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 per cent 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 per cent of the voting power.

(d) If the above conditions are satisfied then the payment by the company to the concern will be dividend.

2.3.3 The intention behind enacting provisions of s. 2(22)(e) is 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 become 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 &1563/M/2012 A.Y.2006-07 & 2008-09 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 s. 2(22)(e) of the Act is to tax dividend in the hands of shareholders. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance. Further, it is an admitted case that under normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under s. 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to 'dividend'. Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to "shareholder". When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under s. 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. &1563/M/2012 A.Y.2006-07 & 2008-09 2.3.4 The Hon'ble Rajasthan High Court in the case of CIT vs. Hotel Hilltop (2008) 217 CTR (Raj) 527 had interpreted the provision in identical manner. It would be apt to quote para 7 of the said judgment which contains the relevant discussion:

"The more important aspect, being the requirement of s. 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 oil 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 paid by the company, whether to the shareholder, or to the concern firm. In which event, it would fall within the expression 'deemed dividend'. Obviously, income from dividend, is taxable as income from other sources, under s. 56 of the Act, 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 Roop &1563/M/2012 A.Y.2006-07 & 2008-09 Kumar and Devendra Kuinar, 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."

2.3.5 It is not in dispute that Section 2 (22) (e) of the Act creates a fiction of making such loan and advance under circumstances, as deemed dividend, would be attracted only when some loan or advance is given by the company to another person who is having particular shareholding in the said company. The undisputed fact in the appellant case is that M/s. Gazebo Developers Pvt. Ltd. a concern in which Director Mr. Madan Singh Bharara had a substantial interest and given a loan of 33,95,000/- to M/s. Om Siddi Vinayak Creation Pvt. Ltd. in which Mr. Madan Singh Bharara has a substantial interest. The AO assessing the case of M/s. Om Siddi Vinayak Creation Pvt. Ltd. has added this sum as deemed dividend in the hands of M/s. Om Siddi Vinayak Creation Pvt. Ltd. which is not a shareholder in the M/s. Gazebo Developers Pvt. Ltd. &1563/M/2012 A.Y.2006-07 & 2008-09 The Hon'ble ITAT following the decision of M/s. Bhaumik Colour Lab. Pvt. Ltd., 118 ITD 1 Mumbai Special Bench and CIT Vs. Universal Medicare Pvt. Ltd. 324 ITR 263 (Born.) has deleted the additions. The Ld.CIT(A)-17 while deciding the case of M/s. Om Siddi Vinayak Creation Pvt. Ltd. deleted the said addition. The Ld.A0 of the appellant stated that Shri Madan Singh Bharara is a registered and beneficial shareholder of M/s. Gazebo Developers Pvt. Ltd. which is a lender company in this case and having more than 20% of shareholding also holds a substantial shareholding in M/s. Om Siddi Vinayak Creation Pvt. Ltd. wherein he holds 90% of the shareholding. It is also a matter of fact as reported by the appellant that the appellant had given a loan to M/s. Gazebo Developers Pvt. Ltd. amounting to Z6,32,63,745/-. Therefore, the advancing of loan By M/s. Gazebo Developers Pvt. Ltd. to M/s. Om Siddi Vinayak Creation Pvt. Ltd. in which the appellant is also a beneficial shareholder is nothing but for the benefit of the registered and beneficial shareholder of M/s. Gazebo Developers. Therefore, the provisions of section 2(22)(e) are squarely applicable in the case of the appellant. The addition made by the Ld.A0 is accordingly confirmed.

3. In the result, the appeal is dismissed.” &1563/M/2012 A.Y.2006-07 & 2008-09