DCIT, MADURAI vs. GLOBAL POLYBAGS IDNUSTRIES (P) LIMITED, VIRUDHUNAGAR

आदेश / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER This appeal by the Revenue is directed against the order of the Commissioner of Income-tax (Appeals)-1, Madurai, dated 27.04.2015 for the assessment year 2009-2010.

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The Revenue has raised the following grounds:- 2.

‘’2. The Commissioner of Income Tax (Appeals) has erred in holding that loan is in the nature of trade advance without bringing specific facts on record to arrive at such a finding and thus holding that the loan could not fall within the meaning of deemed dividend u/s.2(22)(e)of the Income Tax Act.

The facts of the case are that the assessee has taken loan 3.

from their sister concern M/s. Universal Polybags Industries P. Ltd to

the tune of �2,53,05,071/-. According to the Assessing Officer, Smt.

Sadhana and Smt. Seethalakshmi are holding 49% share in M/s.

Global Polybags Industries Ltd. Similarly, there was also 49.5% share

holding in M/s. Universal Polybags Industries Ltd. According to him,

provision of sec. 2(22)(e) of the Act is applicable at the end of

financial year i.e 31.03.2009, as there was accumulated profits in M/s.

Universal Polybags Industries Ltd i.e lending company at �64,03,780/-

Accordingly, he invoked provision of sec. 2(22)(e) and thereby made

an addition of �64,03,780/-. Aggrieved, the assessee preferred an

appeal before the Commissioner of Income Tax (Appeals).

Before the Commissioner of Income Tax (Appeals) the 4.

assessee pleaded that the assessee purchased extrusion and bag

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making works on job basis from M/s. Universal Polybags Industries

Pvt. Ltd. Such job works from them for the assessment year 2009-

2010 is �61,80,757/- on which TDS was deducted. The amount paid/

received was a commercial transaction and adjusted then and there

and also against subsequent dues to the company. The transactions

during the year include advances as well as payments of amounts

which are towards the business transactions with the company on

account of which deemed divided is not applicable. Further, the

assessee submitted that in many judicial decisions it was held that

where assessee itself is not shareholder of lending company, even

though there is common shareholders to both concerns, deemed

dividend under provisions of section 2(22)(e) cannot be made in the

hands of the assessee company. He relied on the following decisions:

(i) Dr. Freide Ardheshir Mehta vs. Union of India (1991) Comp. Cas 210 (Bombay), wherein it was held that ‘’loans means an advance of money, upon the understanding that it shall be paid back, and it may or may not carry interest. A credit sale resulting in a book debt does not account to a loan. (ii) CIT vs. Raj Kumar (2009) 181 taxmann 155 (Del), wherein it was held that ‘’ The usual attributes of a loan are that it involves positive act of lending coupled with the acceptance by the other side of the money as loan. It generally carries interest and there is an obligation of repayment’’. (iii) CIT vs. Creative Dyeing & b Printing (P) Ltd 201031(I) ITCL 93 (Delhi) wherein it was held that “word ‘’advance’’ has to bread in conjunction with the word ‘’loan’. Usually attributes of a loan are

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that it involves positive act of lending, coupled with acceptance by the other side of the money as loan. It generally carried on interest and there is an obligation of repayment. On the other hand, in its widest meaning the term ‘’advance’ may or may not include the obligation of repayment. If it does, then it would be a loan. Thus, arises the conundrum as to what meaning would attribute to the term ‘’advance’’. The rule of construction, to our minds, which answers this conundrum is a nocturne a socials. Therefore, the word has to be constructed with reference to word found in its proximity. Accordingly, it was held that the advance could not be deemed as dividend because the same was received for supply of goods. (iv) ITAT, Mumbai, Special Bench in ACIT vs. Bahumik Colour Lab (P) Ltd 118 ITR 1 (Mum) (SB) wherein held that the sec 2(22) of the Income –tax Act,1961- Deemed dividend – assessment year 1997-98- Whether deemed dividend can be assessed only in hands of a person other than a shareholder – Held, yes – Whether expression ‘shareholder’ refer red to in section 2(22) (e) refers to both a registered shareholder and beneficial shareholder and, thus, if a person is a reregistered shareholder but not beneficial shareholder then provisions of section 2(22) (e) would not apply and similarly if a person is a beneficial shareholder but not a registered shareholder then also provisions of section 2(22) (e) would not apply- Held, yes- Whether deeming provision of section 2(22) (e) as it applies to case of loans or advances by a company to a concern in which its shareholder has substantial interest, I s based n presumption that loan or advances would ultimately be made available to shareholders of company giving loan or advance and therefore, intention of Legislature is to tax dividend only in hands of shareholder and not in hands of concern- Held, yes.

(v) The High Court of Bombay in the case of CIT vs. Jignesh P. Shah (2015) 54 taxmann.com 293, wherein held that the assessee was a 50% shareholder of ‘L’. ‘L’ had advanced money to one ‘N’ company who in turn advanced money to

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assessee. The Assessing Officer brought to tax the amount of loan reeived bythe assessee from ‘N’ as deemed dividend u/s.2(22) (e). On appeal, the Commissioner of Income Tax (Appeals) held that the loan given by ‘N’ to the assessee was not the payment made by it to its shareholder. Thus, the section 2(22)(e) had no application.’’

Accordingly, the Commissioner of Income Tax (Appeals) deleted the

addition by observing that the above decision relied by the assessee

including a Special Bench Decision of ITAT Mumbai, had held that

deemed dividend can be assessed only in hands of a person who is a

shareholder of a lender company and not in hands of a person other

than shareholder and that meaning of section 2(22)(e) cannot be

extended to include others on the ground of common shareholding.

The facts in the instant case are identical as Smt. Sadhana and Smt.

Seethalakshmi are the major shareholders in assessee company M/s.

Global Polybags Industries P.Ltd. itself was not shareholder of lending

company M/s. Universal Polybags Industries P. Ltd. Since the assessee

company was not a shareholder in the lending company, duly following

the above decisions, it was held that the deemed dividend under

provisions of section 2(22)(e) cannot be made in the hands of the

assessee. Against this, the Revenue is in appeal before us.

The ld. Departmental Representative submitted that the 5.

assessee conceded before the Assessing Officer that the addition to

the extent of accumulated profit to be made. Further, there was no

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plea of the assessee regarding business expediency for not making

addition. Being so, he pleaded that the issue may be remitted back to

the file of the Assessing Officer for fresh consideration. In our opinion,

the contention of the ld. Departmental Representative has no merit.

Admittedly, in this case the assessee company is not shareholder in

the lending company. As held by the Special Bench in the case of

ACIT vs. Bhaumik Colour Pvt. Ltd (supra) the deemed dividend could

be assessed only in the hands of a person who was a share holder of

the lender company and not in the hands of a person other than a

shareholder. It was held by the Tribunal in that case at para 39 and

40 of its order as under:-

“39. In the decision of the Tribunal in the case of Nikko Technologies (I) (P) Ltd. (supra), reliance has been placed on Circular No.495 dated 22nd September, 1987 which states as follows:- “Further deemed dividend would be taxable in the hands of the concern, where all the following conditions are satisfied……..” We are of the view that circulars of CBDT to the extent that they do not tone down the rigor of the provisions of the Act in the sense to the extent they are not benevolent are not binding. 40. Apart from the above, it is also noticed that s. 2(22)(e)(iii) provides to a shareholder as follows: “Dividend does not include: (i) to (ii)…………. (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.”

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In the event of the payment of loan or advance by a company to a concern being treated as dividend and taxed in the hands of the concern then the benefit of set off cannot be allowed to the concern, because the concern can never receive dividend from the company which is only paid to the shareholder, who has substantial interest in the concern. The above provisions also therefore contemplate deemed dividend being taxed in the hands of a shareholder only. For the reasons stated above, we are of the view that the law laid down in the case of Nikko Technologies (I) (P) Ltd. (supra) is not correct. We therefore hold that deemed dividend under s. 2(22)(e) of the I.T. Act, 1961 can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other person.”

In view of the above order of the Tribunal, in our opinion the 6.

issue is squarely covered in favour of the assessee. Accordingly, we

are inclined to dismiss the appeal of the Revenue.

In the result, the appeal of the Revenue in ITA 7.

No.1596/Mds/2015 is dismissed.

Order pronounced on Friday, 28th day of August 2015, at Chennai.

Sd/- Sd/- (चं� पूजार�) (एन.आर.एस. गणेशन)) (CHANDRA POOJARI) (N.R.S. GANESAN) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य /ACCOUNTANT MEMBER चे�नई/Chennai �दनांक/Dated:28.08.2015 KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF