M/S. SONAL INDUSTRIES (P) LTD.,MEERUT vs. ACIT, MEERUT

This appeal is preferred by the assessee against the order of the CIT(A) dated 14.03.2014, confirming the addition of Rs.20 lacs in the hands of the assessee as deemed dividend u/s. 2(22)(e) of the Income-tax Act.

The brief facts of the case are that in assessment u/s. 143(3), it was noticed that the assessee has received Rs.20 lacs from M/s. Singhal Spintex Private Limited. The AO was of the view that this amount was though ITA No.4416/Del./2014 2 Sonal Industries Private Limited V ACIT circle-2 Meerut A Y 2009-10 submitted by the assessee is for transfer of plant and machinery, but in fact loan given by M/s. Singhal Spintex Private Limited to the assessee and therefore, as the advance received by the assessee company, he treated the same as deemed dividend in the hands of the assessee u/s. 2(22) (e) of the IT Act. The CIT (A) summarily rejecting the appeal of the assessee, confirmed the above addition.

Before us, the ld. AR of the appellant submitted that the assessee is not a registered shareholder of M/s. Singhal Spintex Private Limited and therefore, deemed dividend in the hands of the assessee cannot be taxed. For this, he placed on record list of shareholders of M/s. Singhal Spintex Private Limited for various period at page No. 9 to 12 of the paper book. It was the main argument of the AR that the deemed dividend can be taxed only in the hands of the registered share holder and for this, he relied on the decision of Hon’ble Delhi High Court in the case of CIT vs. Ankitech (P) Ltd. at 340 ITR 14. He further submitted that even otherwise, the accumulated profits in the hands of M/s. Singhal Spintex Private Limited are much less than the amount of advance of Rs.20 lacs. Therefore he submitted that AO has wrongly taxed deemed dividend in the handsof assessee in absence of any shares whether beneficial or registered in the name of the assessee company. ./2014 3 Sonal Industries Private Limited V ACIT circle-2 Meerut A Y 2009-10

The ld. DR submitted that as advance is not given by M/s. Singhal Spintex Private Limited to the assessee company in the ordinary course of business and therefore is rightly taxed in the hands of the assessee u/s 2(22)( e) of the Act. For this, he relied on the reasons given by the AO at para No. 3 to 7 of the assessment order and he further submitted that there are common shareholders and therefore, the deemed dividend is chargeable to tax in the hands of the company.

We have carefully considered the rival contentions. It is in dispute that the assessee has received loan of Rs.20 lacs from M/s. Singhal Spintex Private Limited though the assessee submitted that it is in relation to plant and machinery. Without going into the purpose of money advanced, it is necessary to examine whether despite assessee not being a registered shareholder whether dividend u/s 2 (22) 9e) can be taxed in his hands. HonourableDelhi high court in case of CIT V Ankitech Private Limited 340 ITR 14 has held that “21. We have seriously deliberated on the aforesaid arguments advanced by the counsels for the revenue. 22. Insofar as the provisions of section 2(22)(e) are concerned, we have already extracted this provision and taken note of the conditions/requisites which are to be established for making provision applicable. In CIT v. C.P. SarathyMudaliar [1972] 83 ITR 170, the Supreme Court had traced out the assessee of this provision in the following manner : ./2014 4 Sonal Industries Private Limited V ACIT circle-2 Meerut A Y 2009-10 "Any payment by a company, not being a company in which the public are substantially interest, of any sum (whether as representing a part of the assets of the company or otherwise) made after 31-5-19987 by way of advance or loan. First limb (a)to a shareholder, being a person who is the beneficial 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 my 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, or any such shareholder, to the extent to which the company in either case possesses accumulated profits." 23. It is rightly pointed out by the Bombay High Court in Universal Medicare (P.) Ltd.'s case (supra) that section 2(22)(e) of the Act is not artistically worded. Be as it may, we may reiterate that as per this provision, the following conditions are to be satisfied : "(1)The payer company must be a closely held company. (2)It applies to any sum paid by way of loan or advance during the year to the following persons : (a)A shareholder holding at least 10 of voting power in the payer company. (b)A company in which such shareholder has at least 20 per cent of the voting power. (c)A concern (other than company) in which such shareholder has at least 20 per cent interest. (3)The payer company has accumulated profits on the date of any such payment and the payment is out of accumulated profits. (4)The payment of loan or advance is not in course of ordinary business activities." 24. The intention behind enacting provisions of section 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 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) 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. 25. 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 section 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 ./2014 5 Sonal Industries Private Limited V ACIT circle-2 Meerut A Y 2009-10 specified under section 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. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non- members. The second category specified under section 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of 'deeming shareholder', then the Legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the revenue would stand answered, once we look into the matter from this perspective. 26. In a case like this, the recipient would be a shareholder by way of deeming provision. It is not correct on the part of the revenue to argue that if this position is taken, then the income 'is not taxed at the hands of the recipient'. Such an argument based on the scheme of the Act as projected by the learned counsels for the revenue on the basis of sections 4, 5, 8, 14 and 56 of the Act would be of no avail. Simple answer to this argument is that such loan or advance, in the first place, is not an income. Such a loan or advance has to be returned by the recipient to the company, which has given the loan or advance. 27. Precisely, for this very reason, the Courts have held that if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend under section 2(22)(e) of the Act. 28. Insofar as reliance upon Circular No. 495, dated 22-9-1997 issued by Central Board of Direct Taxes is concerned, we are inclined to agree with the observations of the Mumbai Bench decision in Bhaumik Colour (P.) Ltd.'s case (supra) that such observations are not binding on the Courts. Once it is found that such loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not a shareholder, and that according to us is the correct legal position, such a circular would be of no avail.”