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Income Tax Appellate Tribunal, BANGALORE ‘B’ BENCH, BANGALORE
Before: SMT ASHA VIJAYARAGHAVAN & SHRI INTURI RAMA RAO
This appeal by the revenue is directed against the order of the CIT(A)-III, Bangalore dated 15-03-2012 for the assessment year : 2007- 08.
In this appeal the revenue has raised the following grounds;
“1. The order of ld. CIT(A) is opposed to law and facts of the case.
ITA No.1043(B)/2015
2. On the facts and circumstances of the case, learned CIT(A) erred in deleting the deemed dividend u/s 2(22)(e) of the IT Act, in the hands of the assessee company without appreciating the fact that the conditions laid down in the provisions of sec.2(22)(e) of the Act and the same was added back to the returned income of the assessee. 3 On these and any other grounds that may be urged at the time of hearing, the Hon’ble ITAT is pleaded to quash the order of CIT(A)
Briefly, the facts of the case are that the assessee is a domestic company duly incorporated under the provisions of Companies Act, 1956. It is engaged in the business of outsourcing of services. The return of income for the assessment year 2007-08 was filed on 26-10-2007 disclosing a loss of Rs.5,14,700/- and this return of income was revised on 29-01-2009 at loss of Rs.6,89,000/-. Subsequently, the case was taken up for scrutiny assessment.
During the course of assessment proceedings, the AO found that the assessee company received loan of Rs.78,21,574/- from M/s Tratum Technologies Pvt.Ltd. The AO further found that M/s Tratum Tech.Pvt.Ltd. is a sister concern of the company in which Shri Haridas Chembukave, is the Director holding 98% shares and the same person also holding 90% in the assessee
ITA No.1043(B)/2015 company and after finding out the reserves and surplus of the said company i.e M/s Tratum Tech.Pvt.Ltd. stood at Rs.7,34,54,600/- and made an addition of Rs.32,26,257/- being the amount received during the year under consideration, as deemed dividend under the provisions of Sec.2(22)()e) of the IT Act, 1961.
Being aggrieved by the order, an appeal was preferred before the CIT(A), who vide impugned order held that the addition cannot be made in the hands of the assessee company, but in the hands of the Director of the said company.
We have heard the rival submission and perused the material on record. The relevant provision of Sec.2(22)(e) of the IT Act, 1961 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 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 ITA No.1043(B)/2015 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 [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
ITA No.1043(B)/2015 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 sub-clause (c) shall include all profits of the company up to the date of liquidation, [but 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 ITA No.1043(B)/2015 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 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 for invoking Sec.2(22)(e) the recipient of loan should be a registered share holder. It is a ‘sinqua-non’ that beneficiary of loan should be shareholders of the company from which loan was received. The mere fact that there are common shareholders, the provisions of Sec.2(22)(e) cannot be invoked. In support of this proposition, we rely on the following decisions;
Karnataka Turned Comp[onents Pvt.Ltd Vs ACIT 49 Taxmann.com 299 (Kar.) 2. CIT Vs Ankitech (P)Ltd. 11 Taxmann.com 100(Del.) 3. IAG Promoters & Developers (P)Ltd 61 Taxmann.com 9(Ahd.)
ITA No.1043(B)/2015
6.1 In fact, the Co-ordinate Bench of Delhi in the case of IAG Promoters &Developers (P)Ltd Vs ACIT held as follows;
“We have heard the rival submission and perused the material on record. Undisputedly, the assessee 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-register4ed shareholders. The Hon’ble Apex Court in the case of CIT Vs C.P.Sarathy Mudaliar (1972) 83 ITR 170 while constituting the provisions of sec.2(6A) (e) of the Act, 1922 which are in pari materia with the provisions of sec.2(22)(e) of the IT 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 assessee is not a shareholder of M/s Countrywide Promoters (P)Ltd. the amount of Rs.1,73,262/- be taxed in the hands of the assessee-company. Hence, the appeal filed by the assessee is allowed”.
ITA No.1043(B)/2015
In the light of the above legal position, we do not find any reason to interfere with the order of the learned CIT(A), hence the appeal filed by the revenue is dismissed.
In the result, the appeal filed by the revenue is dismissed.
Order pronounced in the open court on the 20th November, 2015.