ITO 8(2)(3), MUMBAI vs. SOLAR READYMADES P.LTD, MUMBAI

This appeal is filed by the Revenue and the Cross Objection filed by the assessee against the order of Commissioner of Income Tax

The only grievance of the Revenue in its appeal is that the ld.CIT(A) erred in deleting addition of Rs. 1,58,08,668/- made under section 2(22)(e) of the Act.

Brief facts of the case are that the Assessing Officer while completing the assessment, noticed that the assessee had shown unsecured loans of Rs. 1,92,64,318/- from M/s. Solar Creations Pvt. Ltd. He also noticed that M/s. Solar Creations Pvt. Ltd. had advanced loans to M/s. Solar Readymade Pvt. Ltd. during the Financial Year 2008-09 relevant to the Assessment Year 2009-10 to the extent of Rs.2,84,92,294/-. He also further noticed that one Mr. Ashok Bulchand Mukhi holds 45% shareholding in M/s. Solar Readymade Pvt. Ltd. and 49.05% in M/s. Solar Creations Pvt. Ltd. Since, M/s. Solar Creations Pvt. Ltd. advanced loans to the assessee-company and one of the shareholders is holding not less than 10% of the voting right in assessee company and also holding substantial and beneficial interest in the lending company, he invoked the provisions of section 2(22)(e) and the amount of loans and advances received were treated as deemed dividend under section 2(22)(e) in the hands of the assessee.

On appeal, ld. CIT(A) deleted the additions by following the decision of the Hon'ble Bombay High Court in the case of Impact Containers Pvt. Ltd. in which affirmed the decision of the Special Bench of the Tribunal in the case of Bhaumik Colour (P)Ltd. wherein it was held that the person who obtained the loan amount must be a registered shareholder of the lending company.

Heard both sides and perused the orders of the authorities below and the case-laws relied on. The Assessing Officer while completing the assessment observed that M/s. Solar Creations Pvt. Ltd. has advanced loans to the assessee M/s. Solar Readymade Pvt. Ltd. and the shareholders namely Mr. Ashok Bulchand Mukhi is having 45% and 49.05% shareholding in the companies namely M/s. Solar Creations Pvt. Ltd. and M/s. Solar Readymade Pvt. Ltd. respectively. Therefore, the Assessing Officer was of the view that as one of the shareholders is holding not less than 10% of the voting right in the assessee company is also holding substantial and beneficial interest lending company, the conditions stipulated in section 2(22)(e) are applicable to the assessee company which has taken the loan. Thus, he disallowed Rs.1,58,08,668/- under section 2(22)(e) of the Act. The assessee contended that assessee is not registered shareholder of the lender company and there are no accumulated profits for the lending company and hence, the provisions of section 2(22)(e) have no application. The assessee also relied on the decision of the Special Bench of the Mumbai Bench in the case of Bhaumik Colour (P)Ltd. (120 TTJ 865). Admittedly, the assessee is not a shareholder of the lending company. On perusal of the case-laws, we find that the issue is squarely covered in favour of the assessee wherein 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. It was further held that the expression of C.O. No.100/MUM/2016 ‘shareholder’ referred to in section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person, is a registered shareholder, but not the beneficial shareholder then the provisions of section 2(22)(e) will not apply. Similarly, if a person is a beneficial shareholder but not a registered shareholder then also the provisions of section 2(22)(e) will not apply. This decision of the Special Bench is affirmed by the Hon'ble Bombay High Court in the case of Impact Containers Pvt. Ltd. in ITA No. 114/2012. Ld. CIT(A) taking note of both these decisions, deleted the addition observing as under:- “I have gone through the facts and submissions. The Assessing Officer has relied upon decision given by the Hon'ble ITAT Mumbai, in for concluding that the decision given by a Hon'ble ITAT Special Bench in the case of ACIT vs. Bhaumik Colours Pvt. Ltd. (120 TTJ 865 Mum) is not applicable in the instant case. I have gone through the decision relied upon by the Assessing Officer in ITA NO.2085/MUM/2008 (Assessment Year 2004-05), which is given in the case of Steranco Healthcare Pvt. Ltd. Vs. Department of Income Tax and found that in the said case Hon'ble ITAT Mumbai followed the decision given by Special Bench ITAT Mumbai in the case of Bhaumik Colours Pvt. Ltd. and as a result there of the appeal filed by the revenue was dismissed while holding that section 2(22)(e) of the IT Act is applicable only when the advance/loan has been made by a company to its shareholder in order to be considered as deemed dividend. Now appellant have submitted a copy of decision given by Hon'ble Bombay High Court in case of Impact Containers Pvt. Ltd. in ITA No. 114/2012 upholding decision given in case of Bhaumic Colours by ITAT, Mumbai. In their case, the subject matter of this appeal, the Assessing Officer has not disputed the very fact that appellant i.e. M/s. Solar Readymade Pvt. Ltd. is not a shareholder of lending company named M/s. Solar Creations Pvt. Ltd. On this undisputed fact the loan advanced by the lending company to the appellant cannot be taken as falling within the provisions of section 2(22)(e) of the IT Act and hence the addition made by the Assessing Officer for an amount of Rs. 1,58,08,668/- being not sustainable is deleted herewith. As the first limb of section 2(22)(e) has not been found present in the case, the working of quantum of disallowance for the purpose i.e. upto the reserve and surplus available on the last date of concerned year in the case of lending company is not required to be done and hence that aspect is not dealt with. The ground No.3 is allowed.”

On a reading of the ld. CIT(A)’s order, we find no infirmity in the order of the ld. CIT(A) as ld. CIT(A)’s decision is inconsonance with the decision of the Hon'ble Bombay High Court on the issue. Hence, the C.O. No.100/MUM/2016 order of the ld. CIT(A) is sustained and the grounds of appeal of the Revenue are rejected.

In the result, appeal of the Revenue is dismissed and the Cross Objection of the assessee is also dismissed as infructuous.