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Income Tax Appellate Tribunal, “SMC” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM ]
IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH : KOLKATA [Before Hon’ble Sri N.V.Vasudevan, JM ] I.T.A No. 889/Kol/2015 Assessment Year : 2007-08
Shiv Transport & Travels -vs.- I.T.O., Wd-56(1), Kolkata Kolkata [PAN : AASFS4454N) (Respondent) (Appellant) For the Appellant : Shri Anil Kochar, Advocate For the Respondent : Md.Gayas Uddin Ansari, JCIT, Sr.DR Date of Hearing : 13.01.2016. Date of Pronouncement : 03.02.2016.
ORDER This is an appeal by the Assessee against the order dated 17.2.2015 of CIT(A)- 12, Kolkata, relating to AY 2007-08.
The only addition that is challenged in this appeal is the addition of Rs.9 lacs made by the AO and confirmed by the CIT(A) invoking the provisions of Sec.2(22)(e) of the Income Tax Act, 1961. The provisions of Sec.2(22)(e) of the Act, reads as follows: “Sec.2(22) "dividend" includes—
“(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 31-5-1987, 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 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 ; ITA No.889/Kol/2015-Shiv Transport & Travels A.Y.2007-08 1
(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 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 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 ;”
“Section 2(32) defines the expression “person who has a substantial interest in the company”, in relation to a company, means 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, carrying not less than twenty percent of the voting power.” 3. The provisions of Sec.2(22)(e) treats “loan or advance” given by a company in which public are not substantially interest as distribution of dividend by the company to its shareholders and chargeable to tax. It is being done to bring within the tax net monies paid by the closely held companies to their shareholders who have substantial
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interest in the company, payment by way of loan or advance presuming that the accumulated profits which the company has are being given as loan or advance instead of dividend to avoid tax if such sums are given as Dividend. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholder in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholder, money in the form of an advance or loan.. Nomenclature of this section which is “Deemed Dividend”, connotes that this section has been brought on statue as “Deeming Fiction”. It means that the income termed as dividend is actually not dividend distributed by a closely held company but the amount paid is still treated as dividend and hence the term “Deemed Dividend”.
In the present case the facts are that the Assessee is a partnership firm consisting of four partners viz., Smt.Smiat R.Parikh, Shri.Shivu R.Parikh, shri.Shapath R.Parikh and Shaunak R.Parkh each holding 25% share. The Assessee is in the business of transportation. The partners of the firm also held shares in a private limited company by name M/S.Parikh Inn Pvt. Ltd. (PIPL). The shareholding of the partners of the Assessee in PIPL was as follows: Smt.Smiat R.Parikh 57.36%, ShriShivu R.Parikh 13%, Shri.Shpath R.Parikh 13% and Shaunak R.Parkh 13%
PIPL had to pay Advance Tax for AY 2007-08. It had therefore taken a demand draft for Rs.9 lacs, bearing No.057467 dated 9.12.2006 in favour of RBI, by debit of its current account No.012010200002293 with Axis Bank, Jamshedpur branch. The same was sent to their auditors at Kolkatta M/S.S.B.Dandeker & Co. The staff of M/S.S.B.Dandeker & Co., one Mr.Raghunandan Dutta, was handed over the aforesaid draft for deposit as advance tax payable by PIPL. He inadvertently prepared the challan in the name of the Assessee viz., Shiv Transport & Travels. The Assessee was a sister concern of PIPL.
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After this mistake was found out, the sum of Rs.9 lacs was to be refunded to PIPL by the Assessee. The sum of Rs.9 lacs never reached the Assessee. The Assessee had applied for refund of the sum of Rs.9 lacs, erroneously paid in its name by PIPL and the refund is yet to be received by the Assessee from the Income tax Department. It was so stated across the bar by the learned counsel for the Assessee in the course of hearing before me.
In the meantime PIPL wanted the money from the Assessee. PIPL was a tenant occupying the premises owned by the Assessee. It was agreed between the Assessee and PIPL that by way of adjustment of Rs.9 lacs payable by the Assessee to PIPL, the Assessee will adjust the annual rent of Rs.1,08,000 payable by PIPL. As upto AY 2012-13 adjustments were made accordingly.
The case of the revenue on the above facts is that there was a “loan or advance” of Rs.9 lacs received by the Assessee from PIPL and the same had to be deemed as dividend u/s.2(22)(e) of the Act and brought to tax as income of the Assessee. The other conditions for applicability of the provisions of Sec.2(22)( e) of the Act, according to the AO were satisfied viz., that the Assessee was a person holding not less than ten per cent of the voting power of PIPL.
Before CIT(A) the Assessee pointed out that it had no liability to pay Advance tax and therefore there was no reason why PIPL should pay advance tax of Rs.9 lacs on behalf of the Assessee to the credit of the Central Government towards tax liability. There was no flow of funds in favour of the Assessee in the sense that the money paid in RBI remained with the Tax department and did not reach the Assessee. For a transaction of “loan or advance”, the recipient of the loan or advance should have the benefit of use of the sum given as loan or advance and since the money in question was never available for use by the Assessee, it could not be said that there was any “ loan or advance” by PIPL to the Assessee and therefore the deeming provisions of Sec.2(22) ( e) of the Act are not attracted. It was also contended that the Assessee
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partnership firm was not a shareholder in PIPL and the shareholders in their individual capacity were shareholders in PIPL. It was argued that since the Assessee is not a shareholder the deeming provisions of Sec.2(22)( e) of the Act were not applicable. In this regard reference was made to the decision of the Hon’ble Allahabad High Court in the case of Raj Kumar Singh & Co. 295 ITR 9 (All), wherein the Hon’ble Allahabad High Court held that Clause (e) of s. 2(22) of the Act as it existed clearly provided that if the loan is received by the shareholder, it is only then the said loan can be deemed to be dividend in his hand. In the case before the Hon’ble Allahabad High Court, admittedly, the assessee-firm was not the shareholder of the company, M/s Jai Prakash Associates (P) Ltd., which had given loans to the Assessee firm and it was only the partners of the firm who were the shareholders in the books of the company M/S.Jai Prakash Associates (P) Ltd. The Hon’ble High Court on the above facts held that the loan advanced by M/s.Jai Prakash Associates (P) Ltd., to the firm cannot be deemed to be dividend inasmuch as loan was not to the shareholder but to the partnership firm which was not the shareholder in the books of M/S.Jai Prakash Associates (P) Ltd. The Hon’ble Court also held that it was settled principle of law that the deeming provision has to be construed strictly. The Hon’ble Allahabad High Court also referred to the decision in the case of Howrah Trading Co. Ltd. vs. CIT (1959) 36 ITR 215 (SC) and CIT vs. C.P. Sarathy Mudaliar (1972) 83 ITR 170 (SC). In the later decision, s. 2(6A)(e) of the Act, 1922 was under consideration, which was synonymous to s. 2(22)(e) of the IT Act, 1961. In the said case, members of HUF acquired shares in a company with the fund of the family. Loans were granted to HUF and the question was whether the loans could be treated as dividend income of the family falling within s. 2(6A)(e) of the Act, 1922. The apex Court held that only loans advanced to shareholders could be deemed to be dividends under s. 2(6A)(e) of the Act, the HUF could not be considered to be a "shareholder" under s. 2(6A)(e) of the Act and hence, loans given to the HUF will not be considered as loans advanced to "shareholder" of the company and could not, therefore, be deemed to be its income. The apex Court further held that when the Act speaks of shareholder, it refers to the registered shareholder. The Assessee also placed reliance on the decision of the
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Special Bench in the case of CIT Vs. Bhaumik colour (P) Ltd. 118 ITD 1 (SB)(Mumbai).
The CIT(A) however held that the case of the Assessee would be covered by the provisions of Sec.2(22)( e) of the Act and would within the clause “Loan or Advance” by a company “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)”. In this regard, the CIT(A) held that the same set of persons held shares in PIPL and were also partners in the Assessee firm and therefore it was a case where loan or advance was given by PIIPL to a concern (the Assessee) in which its shareholders or partners had substantial interest. Thus the case of the Assessee be covered by the provisions of Sec.2(22) ( e) of the Act. The CIT(A) thereafter held as follows:
“Thus, in my view it is beyond the scope of this appeal to decide on the issue whether the provisions of section 2(22)(e) are applicable in the case of a firm only for the reason that substantial shareholders in the assessee firm also hold substantial stake in the company which made the loan or advance to the assessee firm. The facts regarding the substantial interest of the common partners/shareholders in the company which advanced the sum of Rs. 9 lakhs (PIPL) and the appellant firm are also not in dispute. The only fact which is the subject matter of a dispute is whether the draft issued 'out of PIPL's funds was deposited by mistake for and on behalf of the appellant firm with RBI as advance tax. Accordingly, the scope of adjudication in this appeal is limited to the factual ' verification of this "mistake". The appellant has furnished la copy of declaration of' Shri Raghunandan Dutta working in the office of M/S S.B. Dandekar & Co., Chartered Accountants to the effect that the draft was to be deposited towards the: advance tax of PIPL and was wrongly deposited by preparing the challan in the name of the appellant firm . It was also stated that the appellant firm was not, required to deposit any advance tax which was also a testimony to the fact that the sum was deposited by mistake in the appellant's name. In my view, this declaration: is self-serving and has been made after the lapse of a long period of the date of the impugned draft. The draft was issued on 20.12.2006 and the declaration was made on 22.07.2010. Further, no documentary evidence has been furnished by the. appellant to prove the mistake as directed by the Hori'ble' Tribunal. It is also not clear as to why the appellant did not immediately return the sum to PIPL if there was a genuine human error as claimed. Further still, the Id. CIT had queried during' the proceedings u/s 263 of the Act as to when the sum of Rs.9 lakhs was actually refunded by the appellant to PIPL to which the appellant replied that the sum was adjusted against rent receivable from PIPL by the appellant. Thus, whatever might have been the actual reason for depositing the sum of Rs. 9 lacs with RBI on behalf of the appellant, in the final analysis it assumed the character of advance payment made to the appellant and as admitted by the appellant in
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its reply dated 17.01.2012 to the Id.CIT, even as on 31/03/2011, the appellant's outstanding liability payable to PIPL was Rs. 2,52,000/-. In the light of these facts, I hold that the appellant has not been able to prove with documentary evidence its claim that the sum of Rs. 9,00,000/- was received by it from PIPL by mistake. Accordingly, the addition of Rs. 9,00,000/- made by the Assessing Officer on account of deemed dividend u] s 2(22)(e) of the Act is confirmed. “
Aggrieved by the order of the CIT(A), the Assessee is in appeal before the Tribunal. I have heard the submissions of the learned counsel for the Assessee who reiterated the stand of the Assessee as put forth before the CIT(A). The learned DR relied on the order of the CIT(A) and further submitted that the fact that the sum of Rs.9 lacs paid as advance tax in the name of the Assessee and that it had never been refunded to the Assessee so far is not borne of the records and such a plea was not taken before the lower authorities.
I have given a very careful consideration to the rival submissions. In my view there is no reason whatsoever to doubt the plea put forth by the Assessee that the sum of Rs.9 lacs was mistaken paid to RBI in the name of the Assessee instead of PIPL. The reason being that the returned income of the Assessee for the relevant AY was only Rs.4,26,150/-. The Assessee would get credit of TDS of Rs.70,480 which was allowed by the AO in the order of assessment. It thus becomes clear that there could not be advance tax liability to the extent of Rs.9 lacs for the Assessee. The contention of the Assessee therefore that the sum in question was mistaken paid to RBI in the name of Assessee instead of PIPL deserves to be accepted. It is a fact that the sum in question i.e., Rs.9 lacs never reached the hands of the Assessee and was not available for use by the Assessee. In such circumstances can it be said that there was any “Loan or Advance” by PIPL to the Assessee. The fact that the rents payable by PIPL to the Assessee were adjusted against the monies refundable by the Assessee to PIPL is a matter of adjustment between the parties. That adjustment cannot be the basis to hold that PIPL has given a “ loan or advance” to the Assessee. The primarily requirement of flow of funds for use by the Assessee from PIPL is essential to say that PIPL gave “Loan or Advance” to the Assessee. Such a requirement being absent in the present
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case, it cannot be said that the conditions for applicability of Sec.2(22)( e) of the Act were satisfied.
I am also of the view even otherwise the provisions of Sec.2(22)( e) of the Act are not attracted in the facts and circumstances of the present case. The case made out by the CIT(A) was that the case of the Assessee would be covered by the provisions of Sec.2(22)( e) of the Act and would within the clause “Loan or Advance” by a company “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)”. In this regard, the CIT(A) held that the same set of persons held shares in PIPL and were also partners in the Assessee firm and therefore it was a case where loan or advance was given by PIIPL to a concern (the Assessee) in which its shareholders or partners had substantial interest. The question is when the admitted position is that the Assessee is not a shareholder of PIPL could the provisions of Sec.2(22)( e) of the Act are attracted. This question has been answered by the Special Bench of ITAT Mumbai in the case of Bhaumik Color (P) Ltd. (supra). In the aforesaid decision the Special Bench was concerned with the second limb of Sec.2(22)(e) of the Act, viz., “to any concern in which such shareholder is a member or a partner and in which he has a substantial interest”. The Special Bench observed that the 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 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 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 Sec.2(22)(e) viz., a registered and a beneficial holder of shares holding 10% voting power. (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 percent 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 ITA No.889/Kol/2015-Shiv Transport & Travels A.Y.2007-08 8
right to participate in profits, carrying not less than twenty percent of the voting power (d) If the above conditions are satisfied then the payment by the company to the concern will be dividend. 14. The Special Bench of ITAT, Mumbai, in the case of Bhaumik Color Labs (supra), considered the question Whether deemed dividend u/s. 2(22)(e) of the Income Tax Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender? The 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. The Special Bench on the above issue has observed as follows:- “30. At the outset it has to be mentioned that provisions of Sec.2(22)(e) which brought in a new category of payment which was to be considered as dividend as introduced by the Finance Act 1987 w.e.f.1-4-88 viz., payment by a company “to any concern in which such shareholder is a member or a partner and in which he has a substantial interest” do not say as to in whose hands the dividend has to be brought to tax, whether in the hands of the “concern” or the “shareholder”. We have already seen the divergent views on this issue which have been referred to in the earlier part of this order.
The above provisions were subject matter of consideration before the Hon’ble Rajasthan High Court in the case of CIT Vs. Hotel Hilltop. 217 CTR 527(Raj). The facts of the case before the Hon’ble Court were as follows. The Assessee was one M/S.Hotel Hilltop a partnership firm. This firm received an advance of Rs.10 lacs from a company M/S.Hilltop palace Hotels (P) Ltd. The shareholding pattern of M/S.Hillltop Palace Hotels (P) Ltd., was as follows:
Shri Roop Kumar Khurana : 23.33% 2. Smt.Saroj Khurana : 4.67% 3. Vikas Khurana : 22% 4. Deshbandhu Khurana: 25% 5. Shri.Rajiv Khurana : 25%
The constitution of the firm Hotel Hill Top was as follows: 1. Shri Roop Kumar Khurana: 45% 2. Shri.Deshbandhu Khurana: 55%
The AO assessed the sum of Rs.10 lacs as deemed dividend u/s.2(22)(e) of the Act in the hands of the firm because the two partners of M/S.Hotel Hill Top
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were holding shares by which they had 10% voting power in M/S.Hill Top Palace Hotels (P) Ltd. They were also entitled to 20% of the income of the firm M/S.Hotel Hill Top. Therefore the loan by M/S.Hill Top Palace Hotels (P) Ltd. To the firm M/S.Hotel Hill Top was treated as deemed dividend in the hands of M/S.Hotel Hill Top, the firm under the Second limb of Sec.2(22)(e) of the Act. The CIT(A) held that since the firm was not the shareholder of the company the assessment as deemed dividend in the hands of the firm was not correct. The order of the CIT(A) was confirmed by the Tribunal. On Revenue’s appeal before the Hon’ble High Court, the following question of law was framed for consideration:-
“Whether on the facts and in the circumstances of the case and in law the learned Tribunal was justified in upholding the order of learned CIT(A) deleting the addition of Rs.10 lacs as deemed dividend under Section 2(22)(e) of the IT Act? ”
The Hon’ble Court held as follows:-
“ The important aspect, being the requirement of section 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 on behalf 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 pad by the company, whether to the shareholder, or to the concerned firm. In which event, it would fall within the expression ‘deemed dividend’. Obviously, income from dividend, is taxable as income from the other sources under section 56, 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 R and D. 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. Thus, the significant requirement of section 2(22)(e) is not shown to exist. The liability of tax, as deemed divided, could be attracted in the hands of the individuals, being the shareholders, and not in the hands of the firm.”
The aforesaid decision of the Hon’ble Rajasthan High Court which is the only decision of High Court, should be sufficient to answer question No.2 which has been referred to the Special Bench by holding that deemed dividend ITA No.889/Kol/2015-Shiv Transport & Travels A.Y.2007-08 10
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. The argument of the learned D.R. that the Hon’ble Rajasthan High Court did not deal with the second limb of Sec.2(22)(e) of the Act is not correct.” 15. The Special Bench further held as follows:-
“34. We are of the view that the provisions of Sec.2(22)(e) does not spell out as to whether the income has to be taxed in the hands of the shareholder or the concern(non-shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of Sec.2(22)(e) of the Act. 35. The intention behind enacting provisions of section 2(22)(e) are 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 became 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) is to tax dividend in the hands of shareholder. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which it’s shareholder has substantial interest, is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern. 36. The basis of bringing in the amendment to Sec.2(22)(e) of the Act by the Finance Act, 1987 w.e.f 1-4-88 is to ensure that persons who control the affairs of a company as well as that of a firm can have the payment made to a concern from the company and the person who can control the affairs of the concern can drawn the same from the concern instead of the company directly making payment to the shareholder as dividend. The source of power to control the affairs of the company and the concern is the basis on which these provisions have been made. It is therefore proper to construe those provisions as contemplating a charge to tax in the hands of the shareholder and not in the hands of a non-shareholder viz., concern. A loan or advance received by a concern is not in the nature of income. In other words there is a deemed accrual of income even u/s.5(1)(b) in the hands of the shareholder only and not in the hands of the payee viz., non-shareholder (Concern). Sec.5(1)(a) contemplates that the receipt or deemed receipt should be in the nature of income. Therefore the deeming fiction can be applied only in the hands of the shareholder and not the non-shareholder viz., the concern.
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The definition of Dividend U/s.2(22)(e) of the Act is an inclusive definition. Such inclusive definition enlarges the meaning of the term “Dividend” according to its ordinary and natural meaning to include even a loan or advance. Any loan or advance cannot be dividend according to its ordinary and natural meaning. The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word “Dividend” is extended to loans and advances to a shareholder or to a concern in which a shareholder is substantially interested deeming them as Dividend in the hands of a shareholder the ordinary and natural meaning of the word “Dividend” is altered. To this extent the definition of the term “Dividend can be said to operate. If the definition of “Dividend” is extended to a loan or advance to a non shareholder the ordinary and natural meaning of the word dividend is taken away. In the light of the intention behind the provisions of Sec.2(22)(e) and in the absence of indication in Sec.2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a non-shareholder cannot be taxed as Deemed Dividend in the hands of a non-shareholder.”
The aforesaid view has since been approved in several decisions rendered by Hon’ble High Court of Bombay and Delhi in the case of CIT Vs. Universal Medicare Pvt. Ltd., 324 ITR 263 (Bom) and CIT Vs. Ankitech Pvt.Ltd. & others 340 ITR 14 (Del.). Since the Assessee in the present case is not a shareholder in the lender company, I am of the view that the above decision is squarely applicable to the facts of the Assessee’s case.
Besides the above, I am also of the view that the decision of the Hon’ble Allahabad High Court in the case of Raj Kumar Singh & Co. 295 ITR 9 (All), wherein the Hon’ble Allahabad High Court held that Clause (e) of s. 2(22) of the Act as it existed clearly provided that if the loan is received by the shareholder, it is only then the said loan can be deemed to be dividend in his hand, would be applicable in the present case. In the case before the Hon’ble Allahabad High Court, admittedly, the assessee-firm was not the shareholder of the company, M/s Jai Prakash Associates (P) Ltd., which had given loans to the Assessee firm and it was only the partners of the firm who were the shareholders in the books of the company M/S.Jai Prakash Associates (P) Ltd. The Hon’ble High Court on the above facts held that the loan advanced by M/s.Jai Prakash Associates (P) Ltd., to the firm cannot be deemed to be dividend inasmuch as loan was not to the shareholder but to the partnership firm ITA No.889/Kol/2015-Shiv Transport & Travels A.Y.2007-08 12
which was not the shareholder in the books of M/S.Jai Prakash Associates (P) Ltd. The Hon’ble Court also held that it was settled principle of law that the deeming provision has to be construed strictly. Even this decision of the Hon’ble Allahabad High Court applies to the facts of the Assessee’s case.
In view of the aforesaid decisions, I am of the view that the order of CIT(A) cannot be sustained as in any case there can be no addition on account of deemed dividend u/s.2(22)( e ) of the Act in the hands of the Assessee in the facts and circumstances of the present case. I therefore delete the addition made by the AO and allow the appeal of the Assessee.
In the result, the appeal of the Assessee is allowed. Order pronounced in the Court on 03.02.2016.
Sd/- [ N.V.Vasudevan ] Judicial Member Dated : 03.02.2016. [RG PS]
Copy of the order forwarded to:
1.Shiv Transport & Travels, C/o S.L.Kochar Advoate, 86 Canning Street, Kolkata-1. 2. ITO, Ward-56(1), Kolkata. 3. CIT(A)-12, Kolkata 4. CIT-14,Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.