Hingorani Air Products Pvt.Ltd., Baroda V. The ACIT.,Circle-1(2), Baroda

ITA 146/AHD/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5693 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 5 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-07-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 15-06-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 08-01-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GAURAV BATHAM
• Keywords: Business expenditure; Deemed dividend
• Section: 234B

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE S/SHRI MAHAVIR SINGH, JM AND D.C.AGRAWAL, AM M/S HINGORANI AIR PRODUCTS (P) LTD., SATYAM APPARTMENT, 2 ND FLOOR, OPP. VUDA OFFICE, FATEGUNJ, BARODA. VS. ASSTT. CIT, CIR-1(2), BARODA. (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI BHAVIN MARFATIA, AR REVENUE BY:- SHRI GAURAV BATHAM, DR O R D E R PER D. C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE ASSESSEE RAISING FO LLOWING GROUNDS :- (1) THE LD. COMMISSIONER OF INCOME-TAX (A)-I, BARODA [T HE CIT(A)] ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE1(2), BA RODA (THE AO) IN MAKING ADDITION OF DEPOSIT AMOUNTING TO RS.9 0,000/- BY INVOKING PROVISIONS OF SECTION 41(1) OF THE INCOME- TAX ACT, 1961 (THE ACT). (2) THE LD. CIT(A) ERRED IN FACT AND IN LAW IN CONFIRMI NG ACTION OF THE AO IN DISALLOWING INSURANCE PREMIUM OF RS.6,34, 494/- ON THE GROUND THAT THE SAID EXPENSES ARE NOT WHOLLY AN D EXCLUSIVELY FOR BUSINESS PURPOSE. (3) THE LD. CIT(A) ERRED IN FACT AND IN LAW IN CONFIRMI NG ACTION OF THE AO IN MAKING ADDITION OF RS.16,00,000/- INVOKIN G PROVISIONS OF SECTION 2(22)(E) OF THE ACT. ITA NO.146/AHD/2008 ASST. YEAR :2004-05 2 (4) THE LD. CIT(A) ERRED IN FACT AND IN LAW IN CONFIRMI NG ACTION OF THE AO IN CHARGING INTEREST U/S 234B OF THE ACT. (5) THE LD. CIT(A) ERRED IN FACTS AND IN LAW IN CONFIRM ING ACTION OF THE AO IN INITIATING PENALTY PROCEEDINGS U/S 271(1) (C) OF THE ACT. 2. THE FACTS OF THE CASE ARE THAT ASSESSEE COMPANY IS ENGAGED IN TRADING AND MANUFACTURING OF INDUSTRIAL GASES. 3. THE FIRST ISSUE RELATES TO ADDITION OF RS.90,000 /- BY INVOKING PROVISIONS OF SECTION 41(1) OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO FOUND THAT FOLLOWING AMOUNTS ARE OUTSTANDING IN THE BOOKS OF ASSESSEE.:- (A) M/S J. J. ELEVATORS & ERECTORS RS.50,000/- (B) M/S NILESH ENTERPRISES RS.15,000/- (C) M/S PILOT COOKING GAS (P) LTD. RS.20,000/- (D) M/S SHRI GANESH ENGINEERING RS.5,000/- IT WAS EXPLAINED THAT ASSESSEE HAS BEEN TAKING SECU RITY DEPOSITS AGAINST CYLINDERS BY WHICH GAS SALES WERE MADE TO THE DEPOS ITORS. IN RESPECT OF ABOVE 4 PARTIES AO FOUND THAT NO BUSINESS TRANSACTI ON WAS CARRIED OUT WITH THE SAID PARTIES EITHER DURING THE YEAR OR IN THE IMMEDIATELY PRECEDING YEAR. IT WAS SUBMITTED THAT SAID PARTIES WERE NOT TRACEABLE AND OR THERE IS NO RECORD OF ANY TRANSACTION OF THE PAS T FEW YEARS. FURTHER THAT THE ASSESSEE COMPANY IS CONSTANTLY TRACING THOSE PA RTIES AND THEIR AMOUNT WILL BE RETURNED TO THEM IF THEY ARE TRACED. THE AO , HOWEVER, HELD THAT THESE DEPOSITS WERE LYING WITH THE ASSESSEE COMPANY FOR A NUMBER OF YEARS AND ASSESSEE WAS UNABLE TO EXPLAIN WHETHER AN Y CYLINDER WAS STILL LYING WITH THESE PARTIES OR WHETHER THESE PARTIES H AVE CEASED TO CARRY ANY 3 BUSINESS OR ANY BUSINESS RELATIONSHIP WITH THE ASSE SSEE. SINCE LIABILITIES HAVE CEASED TO EXIST BECAUSE OF PASSAGE OF TIME, TH E SUM OF RS.90,000/- WAS TREATED AS CESSATION OF LIABILITIES AND ACCORDI NGLY TAXABLE UNDER SECTION 41(1). 4. THE LD. CIT(A) ALSO CONFIRMED THE DECISION OF AO AS UNDER :- 5. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS OBSERVED THAT THE APPELLANT HAD BEEN SPECIFICALLY ASKED IF THESE PART IES INVOLVED HAD ACTUALLY RETURNED THE CYLINDERS TO THE APPELLANT OR HAD KEPT THE SAME WITH THEMSELVES. HOWEVER, THE APPELLANT DID NOT CLARIFY THE SAME AT THE ASSESSMENT STAGE NOR HAS IT BEEN CLARIFIED BEFORE M E. THE DEPOSITS HAVE ADMITTEDLY BEEN MADE AS SECURITY AGAINST THESE CYLI NDERS. IT IS ALSO UNDISPUTED THAT NO BUSINESS TRANSACTIONS HAVE TAKEN PLACE BETWEEN THE APPELLANT AND THESE PARTIES FOR A NUMBER OF YEARS. UNDER THE CIRCUMSTANCES, THE ADDITION MADE BY THE AO ON THE G ROUND THAT IT WAS A CASE OF CESSATION OF LIABILITY IS CONFIRMED. 5. BEFORE US, LD. AR FOR THE ASSESSEE SUBMITTED THA T THESE AMOUNTS HAVE NEVER BEEN CLAIMED AS DEDUCTION OR ALLOWANCE I N ANY ASSESSMENT YEAR EITHER AS LOSS, EXPENDITURE OR TRADING LIABILI TY. THEREFORE, THEY CANNOT BE TREATED AS INCOME U/S 41(1). FURTHER ASSESSEE IS ALWAYS READY TO PAY BACK THE MONEY TO THE DEPOSITORS AS AND WHEN THEY T URN UP TO CLAIM THEIR DEPOSITS AND, THEREFORE, LIABILITY COULD NOT BE SAI D TO HAVE CEASED TO EXIST. FURTHER IT WAS SUBMITTED THAT THERE IS NO VOLUNTARY ACT ON THE PART OF THE DEPOSITORS SO THAT IT CAN BE SAID THAT THERE WAS RE MISSION OF THE LIABILITY. 6. ON THE OTHER HAND, LD. DR RELIED ON THE ORDERS O F AO AND THE LD. CIT(A). 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THE CASE OF THE A SSESSEE DESERVES TO BE 4 ALLOWED. FOR THE SAKE OF CONVENIENCE WE REPRODUCE S ECTION 41(1) AS UNDER:- SEC.41. PROFITS CHARGEABLE TO TAX.--(1) WHERE AN A LLOWANCE OR DEDUCTION HAS BEEN MADE IN THE ASSESSMENT FOR ANY YEAR IN RES PECT OF LOSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE AS SESSEE (HEREINAFTER REFERRED TO AS THE FIRST-MENTIONED PERSON) AND SUBS EQUENTLY DURING ANY PREVIOUS YEAR,-- (A) THE FIRST-MENTIONED PERSON HAS OBTAINED, WHETHE R IN CASH OR IN ANY OTHER MANNER WHATSOEVER, ANY AMOUNT IN RESPECT OF S UCH LOSS OR EXPENDITURE OR SOME BENEFIT IN RESPECT OF SUCH TRAD ING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF, THE AMOUNT OBTAINED BY SUCH PERSON OR THE VALUE OF BENEFIT ACCRUING TO HIM SHALL BE DEEMED TO BE PROFITS AND GAINS OF BUSINESS OR PROFESSION AND ACCORDINGLY CHARGEABL E TO INCOME-TAX AS THE INCOME OF THAT PREVIOUS YEAR, WHETHER THE BUSIN ESS OR PROFESSION IN RESPECT OF WHICH THE ALLOWANCE OR DEDUCTION HAS BEE N MADE IS IN EXISTENCE IN THAT YEAR OR NOT; OR FOR TAXING ANY CESSATION OR REMISSION OF LIABILITY FOLLOWING CONDITIONS ARE REQUIRED TO BE SATISFIED:- (1) SUCH REMISSION OR CESSATION HAS TO BE IN RESPECT OF ANY LOSS, EXPENDITURE OR TRADING LIABILITY; (2) AN ALLOWANCE OR DEDUCTION HAS BEEN MADE IN THE ASSE SSMENT OF THE ASSESSEE FOR ANY ASSESSMENT YEAR IN RESPECT OF SUCH LOSS, EXPENDITURE OR TRADING LIABILITY; (3) SUBSEQUENTLY THE ASSESSEE HAS OBTAINED ANY AMOUNT I N RESPECT OF SUCH LOSS OR EXPENDITURE; (4) THE ASSESSEE HAS OBTAINED ANY AMOUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE IN CASH OR ANY OTHER MANNER, WHATSOEVE R, OR (5) THE ASSESSEE HAS OBTAINED SOME BENEFIT IN RESPECT O F SUCH TRADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF; 5 (6) THEN THE AMOUNT OBTAINED BY ASSESSEE OR THE VALUE O F BENEFIT ACCRUED TO HIM SHALL BE TREATED AS INCOME TAXABLE I N THE YEAR WHEN SUCH AMOUNT IS OBTAINED OR BENEFIT ACCRUES TO HIM. 6. HONBLE PUNJAB & HARYANA HIGH COURT IN CIT VS. S ITADEVI JUNEJA, INCOME-TAX APPEAL NO.619 OF 2009 PRONOUNCED ON DECE MBER, 2009 HELD THAT MERELY BECAUSE LIABILITIES ARE OUTSTANDING FOR THE LAST SIX YEARS, IT CANNOT BE PRESUMED THAT THE SAME HAVE CEASED TO EXI ST FOR THE PURPOSE OF SECTION 41(1). HONBLE PUNJAB & HARYANA HIGH COURT IN THE ABOVE CASE HAVE HELD AS UNDER :- AFTER HEARING LEARNED COUNSEL FOR THE APPELLANT AN D GOING THROUGH THE IMPUGNED ORDER, WE DO NOT FIND ANY MERIT IN THE INS TANT APPEAL. IT IS THE CONCEDED POSITION THAT IN THE ASSESSEE'S BALANCE SH EET, THE AFORESAID LIABILITIES HAVE BEEN SHOWN, WHICH ARE PAYABLE TO T HE SUNDRY CREDITORS. SUCH LIABILITIES, SHOWN IN THE BALANCE SHEET, INDIC ATE THE ACKNOWLEDGMENT OF THE DEBTS PAYABLE BY THE ASSESSEE. MERELY BECAU SE SUCH LIABILITY IS OUTSTANDING FOR THE LAST SIX YEARS, IT CANNOT BE PR ESUMED THAT THE SAID LIABILITIES HAVE CEASED TO EXIST. IT IS ALSO CONCE DED POSITION THAT THERE IS NO BILATERAL ACT OF THE ASSESSEE AND THE CREDITORS, WHICH INDICATES THAT THE SAID LIABILITIES HAVE CEASED TO EXIST. IN ABSENCE OF ANY BILATERAL ACT, THE SAID LIABILITIES COULD NOT HAVE BEEN TREATED TO HAV E CEASED. IN VIEW OF THESE FACTS, THE CIT (A) AS WELL AS THE ITAT HAVE R IGHTLY COME TO THE CONCLUSION THAT THE ASSESSING OFFICER HAS WRONGLY I NVOKED THE EXPLANATION-I OF SECTION 41 (I) OF THE ACT AND MADE THE AFORESAID ADDITION ON THE BASIS OF PRESUMPTION, CONJECTURES AND SURMIS ES. IT HAS BEEN FURTHER FOUND THAT THE ASSESSING OFFICER FAILED TO SHOW THAT IN ANY EARLIER YEAR, ALLOWANCE OF DEDUCTION HAD BEEN IN RESPECT OF ANY TRADING LIABILITY INCURRED BY THE ASSESSEE. IT WAS ALSO NOT PROVED T HAT ANY BENEFIT WAS OBTAINED BY THE ASSESSEE CONCERNING SUCH TRADING LI ABILITY BY WAY OF REMISSION OR CESSATION THEREOF DURING THE CONCERNED YEAR. THUS, THERE DID NOT ACCRUE ANY BENEFIT TO THE ASSESSEE WHICH CO ULD BE DEEMED TO BE THE PROFIT OR GAIN OF THE ASSESSEE'S BUSINESS, WHIC H WOULD OTHERWISE NOT BE THE ASSESSEE'S INCOME. IT HAS BEEN FARTHER FOUN D AS FACT THAT THE ASSESSEE HAD FILED THE COPIES OF ACCOUNTS OF SUNDRY CREDITORS SIGNED BY THE CONCERNED CREDITORS. IN VIEW OF THIS FACT, IN OUR OPINION, THE ITAT HAS RIGHTLY COME TO THE CONCLUSION THAT CONFIRMATION FR OM THE CREDITORS WERE PRODUCED. 6 7. A SIMILAR VIEW WAS TAKEN BY HONBLE PUNJAB & HAR YANA HIGH COURT IN CIT VS. GP INTERNATIONAL LTD. ITA NO.618 O F 2009 PRONOUNCED ON 2ND DECEMBER, 2009 WHEREIN IT IS HELD THAT PROVI SIONS OF SECTION 41(1) AND EXPLANATION ARE NOT APPLICABLE WHERE ASSESSEE I S STILL SHOWING THE SAME AMOUNT AS LIABILITY IN ITS BOOKS AND HAS NOT W RITTEN OFF THE SAME. 8. THE ITAT, MUMBAI IN DSA ENGINEERS (BOMBAY) VS. ITO (2009) 30 SOT 31 (MUM) HELD THAT MERE FACT THAT THE AMOUNT S WERE OUTSTANDING FOR MORE THAN THREE YEARS OR RECORDED IN UNILATERAL ENTRIES IN THE BOOKS OF ACCOUNT, THE PROVISIONS OF SECTION 41(1) COULD NOT BE APPLIED AS THERE IS NO CESSATION OF LIABILITIES, LEGALLY OR OTHERWISE. 9. HONBLE BOMBAY HIGH COURT IN MAHINDRA & MAHINDRA LTD. VS. CIT (2003) 261 ITR 501(BOM) HELD THAT WHERE CREDITO R COMPANY WAIVED PRINCIPAL AMOUNT OF LOAN THEN SUCH WAIVER COULD NEI THER BE ASSESSED UNDER SECTION 28(4) NOR U/S 41(1). THE ASSESSEE SHO ULD HAVE OBTAINED DEDUCTION IN ANY ASSESSMENT YEAR IN RESPECT OF LOSS , EXPENDITURE OR TRADING LIABILITIES INCURRED BY THE ASSESSEE. WHERE NO SUCH DEDUCTION HAS BEEN CLAIMED IN ANY PREVIOUS YEAR THEN SUBSEQUENTLY SUCH AMOUNT CANNOT BE TAXED UNDER SECTION 41(1). 10. SIMILAR VIEW WAS TAKEN BY HON. DELHI HIGH COURT IN CIT VS. SADEN VIKAS INDIA LTD. (2010) 320 ITR 538 (DEL) WHEREIN IT WAS HELD THAT WHERE AN AMOUNT IS NOT ENTERED IN COMPUTATION OF IN COME OR CLAIMED AS EXPENDITURE OR LOSS IN AN EARLIER YEAR, SECTION 41( 1) HAD NO APPLICATION. 11. IN THE PRESENT CASE UNDISPUTED FACTS ARE THAT T HESE DEPOSITS MADE BY THE PERSONS WHO HAD TAKEN FILLED CYLINDERS FROM THE ASSESSEE HAD NOT BEEN TAKEN INTO ACCOUNT WHILE COMPUTING TAXABLE INCOME O F THE ASSESSEE IN ANY 7 OF THE PREVIOUS YEAR. ONCE THIS IS SO, PROVISIONS O F SECTION 41(1) WILL NOT BE APPLICABLE. SIMILARLY, MERELY BECAUSE CERTAIN AM OUNT IS STANDING IN THE BALANCE SHEET FOR NUMBER OF YEARS THERE COULD NOT B E A CASE OF ASSESSEE DERIVING ANY BENEFIT OR OF CESSATION OR REMISSION O F LIABILITY. THUS THIS GROUND OF ASSESSEE IS ALLOWED. 12. THE NEXT GROUND IS REGARDING DISALLOWANCE OF IN SURANCE PREMIUM OF RS.6,34,494/-. 13. THE FACTS RELATING TO THE GROUND AND THAT THE A SSESSEE HAS TAKEN INSURANCE POLICIES ON THE LIVES OF TWO DIRECTORS AN D PAID INSURANCE PREMIUM OF RS.6,34,494/-. IT WAS ORIGINALLY CLAIMED AS KEY-MEN INSURANCE POLICY SCHEME BUT LATER IT WAS FOUND BY T HE AO THAT BENEFICIARIES OF THESE POLICIES WERE THE SPOUSES OF THE DIRECTORS AND NOT THE ASSESSEE COMPANY AND, THEREFORE, IT COULD NOT B E ALLOWED AS BUSINESS EXPENDITURE IN THE CASE OF ASSESSEE COMPANY. THE LD . CIT(A) CONFIRMED THE DECISION OF THE AO BY HOLDING AS UNDER :- 7. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS OBSERVED THAT THE APPELLANT HAS DENIED THAT THE POLICY UNDER QUESTION IS A KEYMAN INSURANCE POLICY. COPY OF THE INSURANCE POLICY HAS BEEN PLACED ON RECORD. IN THIS REGARD THE AO HAD ALSO OBSERVED AT PARA 4.1 OF THE ORDER THAT MOREOVER, IN BOTH THE CASES THE NOMINATION HA S BEEN MADE IN FAVOUR OF THE SPOUSE OF THE SAID DIRECTOR OF THE AS SESSEE COMPANY WHICH FACTOR DOES NOT MAKE A POLICY TAKEN BY THE COMPANY TO FALL UNDER THE GENRE OF KEY MEN INSURANCE POLICY. UNDER THE CIRCUM STANCES THERE IS NO DISPUTE ON THE FACTS THAT IT IS NOT A CASE OF KEY M AN INSURANCE POLICY. THAT BEING SO, IT CANNOT BE TREATED AS A BUSINESS EXPEND ITURE IN THE HANDS OF THE COMPANY. UNDER THE CIRCUMSTANCES THE ADDITION M ADE BY THE AO OF RS.6,34,494/- IS CONFIRMED. 8 14. AGAINST THIS, LD. AR FOR THE ASSESSEE SUBMITTED THAT THIS AMOUNT HAS BEEN TREATED AS PERQUISITES IN THE HANDS OF THE DIR ECTORS AND, THEREFORE, IT IS EQUIVALENT TO SALARY AND, THEREFORE, IT SHOULD B E ALLOWED AS DEDUCTION. 15. THE LD. DR ON THE OTHER HAND, RELIED ON THE ORD ERS OF AUTHORITIES BELOW. 16. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE RES TORE THE MATTER TO THE FILE OF AO TO VERIFY WHETHER INSURANCE PREMIUM PAID BY THE ASSESSEE COMPANY HAS BEEN OFFERED FOR TAXATION IN THE HANDS OF DIRECTORS AND IF YES, THEN IN WHAT FORM, AND WHETHER TREATED AS PART OF SALARY OR AS PERQUISITES. IN CASE THIS AMOUNT IS TREATED AS TAXA BLE IN THE HANDS OF THE DIRECTORS THEN THE SAME SHOULD BE ALLOWED IN THE HA NDS OF THE ASSESSEE COMPANY AS PART OF SALARY/PERQUISITES. THIS GROUND OF ASSESSEE IS ALLOWED BUT FOR STATISTICAL PURPOSES. 17. THE NEXT GROUND IS ABOUT TREATING RS.16,00,000/ - AS DEEMED DIVIDEND IN THE HANDS OF SSESSEE COMPANY. 18. THE FACTS RELATING TO THIS ISSUE ARE THAT THE T WO DIRECTORS OF THE ASSESSEE COMPANY TOGETHER HELD 40% SHARES IN ANOTHE R COMPANY NAMELY M/S G.S. GASES P. LTD. WHOSE BALANCE SHEET REFLECTE D ACCUMULATED PROFITS OF RS.47,36,047/-. THE AO FURTHER OBSERVED THAT M/S G.S. GASES P. LTD. HAD ADVANCED RS.16 LACS TO THE ASSESSEE COMPANY AS ON ACCOUNT PAYMENT IN THE NATURE OF LOAN/ADVANCE/FINANCIAL ACCOMMODATI ON. THE AO SOUGHT TO TAX THIS SUM AS DEEMED DIVIDEND U/S 2(22)(E) IN THE HANDS OF ASSESSEE COMPANY. THE AO HELD THAT THE DIRECTORS OF THE ASSE SSEE COMPANY HAVE MORE 10% OF VOTING RIGHTS IN THE LENDER COMPANY AND , THEREFORE, LOAN 9 GIVEN BY LENDER COMPANY IS TAXABLE AS DEEMED DIVIDE ND IN THE HANDS OF ASSESSEE COMPANY. 19. THE LD. CIT(A) CONFIRMED THE DECISION OF AO BY HOLDING AS UNDER : 9. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS OBSERVED THAT THE APPELLANT HAS NOT DENIED THE EXISTENCE OF THE BASIC FACTS THAT THE TWO DIRECTORS HAVE A SHARE HOLDING IN EXCESS OF 10% IN THE APPELLANT COMPANY AND, THEREFORE, MORE THAN 10% OF THE VOTING POWER A ND THAT TOGETHER THEY HOLD 40% OF SHARE HOLDING IN M/S G. S. GASES P. LTD . AND, THAT THE SAID COMPANY HAD ACCUMULATED PROFITS OF RS.47,36,047/- A ND HAD ADVANCED RS.16,00,000/- TO THE APPELLANT COMPANY. THAT BEING SO, THIS IS TO BE TREATED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. THE ADDITION MADE BY THE AO IS, THEREFORE, CONFIRMED. 20. BEFORE US, THE LD. AR FOR THE ASSESSEE SUBMITTE D THAT NOW THE CASE IS COVERED BY THE DECISION OF ITAT MUMBAI (SPECIAL BENCH) IN THE CASE OF ACIT VS. BHAUMIK COLOUR (P) LTD. (2009) 118 ITD 1 (MUM) (SB) WHEREIN IT HAS BEEN HELD AS UNDER :- THE PROVISIONS OF SECTION 2(22)(E) CREATE A FICTIO N BRINGING IN AMOUNTS PAID OTHERWISE THAN AS DIVIDEND INTO THE NE T OF DIVIDENDS. THEREFORE, CLAUSE (E) OF SECTION 2(22) MUST BE GIVE N A STRICT INTERPRETATION. IN THE INSTANT CASE, THERE WAS NO D ISPUTE THAT THE COMPANIES WHICH GAVE THE LOAN OR ADVANCE WERE ONE I N WHICH PUBLIC WAS NOT SUBSTANTIALLY INTERESTED. NOR WAS THERE ANY DISPUTE THAT THESE COMPANIES POSSESSED ACCUMULATED PROFITS TO THE EXTE NT OF THE LOAN OR ADVANCE. [PARA 19] THE EXPRESSION SHAREHOLDER BEING A PERSON WHO IS T HE BENEFICIAL OWNER OF SHARES REFERRED TO IN FIRST LIMB OF SECTI ON 2(22)(E) REFERS TO BOTH A REGISTERED SHAREHOLDER AND BENEFICIAL SHAREH OLDER. IF A PERSON IS A REGISTERED SHAREHOLDER BUT NOT THE BENEFICIAL SHAREHOLDER THAN THE PROVISIONS OF SECTION 2(22)(E) WOULD NOT APPLY. SIM ILARLY IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SHARE HOLDER THEN ALSO THE FIRST LIMB OF PROVISIONS OF SECTION 2(22)(E) WOULD NOT APPLY. [PARA 24] 10 THE NEW CATEGORY OF PAYMENT WHICH WAS CONSIDERED AS DIVIDEND INTRODUCED BY THE FINANCE ACT, 1987 WITH EFFECT FRO M 1-4-1988 BY THE SECOND LIMB OF SECTION 2(22)(E) IS PAYMENT TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WH ICH HE HAS A SUBSTANTIAL INTEREST. [PARA 25] THE FOLLOWING CONDITIONS ARE REQUIRED TO BE SATISFI ED FOR APPLICATION OF THE ABOVE CATEGORY OF PAYMENT TO BE REGARDED AS DIV IDEND : (A) THERE MUST BE A PAYMENT TO A CONCERN BY A COMP ANY. (B) A PERSON MUST BE SHAREHOLDER OF THE COMPANY BE ING A REGISTERED HOLDER AND BENEFICIAL OWNER OF SHARES (NOT BEING SH ARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RI GHT 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 SHARE HOLDER REFERRED TO IN THE EARLIER PART OF SECTION 2(22)(E), VIZ ., A REGISTERED AND A BENEFICIAL HOLDER OF SHARES HOLDING 10 PER CENT VOTING POWER. (C) THE VERY SAME PERSON REFERRED TO IN (B) ABOVE MUST ALSO BE A MEMBER OR A PARTNER IN THE CONCERN HOLDING SUBSTANT IAL 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 PER CENT OF THE INCOME OF SUCH CONCERN; AND WHERE THE CONCERN IS A COMPANY HE MUST BE THE OWNER OF SHARES, NOT BE ING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS, CARRYING NOT LESS THAN TWEN TY PER CENT OF THE VOTING POWER. (D) IF THE ABOVE CONDITIONS ARE SATISFIED THEN THE PAYMENT BY THE COMPANY TO THE CONCERN WILL BE DIVIDEND. [PARA 26] 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 PR OFITS WOULD NOT DISTRIBUTE SUCH PROFIT AS DIVIDEND BECAUSE IF SO DI STRIBUTED THE DIVIDEND INCOME WOULD BECOME TAXABLE IN THE HANDS O F THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED P ROFITS AS DIVIDEND, 11 COMPANIES DISTRIBUTE THEM AS LOAN OR ADVANCES TO SH AREHOLDERS OR TO CONCERN IN WHICH SUCH SHAREHOLDERS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT ON BEHALF OF OR FOR THE INDIVIDUAL BENE FIT OF SUCH SHAREHOLDER. IN SUCH AN EVENT, BY THE DEEMING PROVI SIONS SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22)(E) IS TO TAX DIVIDE ND 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 ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST, IS BASED ON THE PRESUMPTION T HAT THE LOAN OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. THE INTENTI ON OF THE LEGISLATURE IS, THEREFORE, TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF THE CONCERN. [ PARA 35] THE DEFINITION OF DIVIDEND UNDER SECTION 2( 22 )( E ) IS AN INCLUSIVE DEFINITION. SUCH INCLUSIVE DEFINITION ENLARGES THE MEANING OF THE TERM DIVIDEND ACCORDING TO ITS ORDINARY AND NATURAL ME ANING 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 S HARE IN PROFITS TO AN INVESTOR IN THE SHARE CAPITAL OF A LIMITED COMPA NY. 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 SHAREHOLDE R 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 C AN BE SAID TO OPERATE. IF THE DEFINITION OF DIVIDEND IS EXTENDED TO A LO AN OR ADVANCE TO A NON-SHAREHOLDER, THE ORDINARY AND NATURAL MEANING O F THE WORD DIVIDEND IS TAKEN AWAY. IN THE LIGHT OF THE INTEN TION BEHIND THE PROVISIONS OF SECTION 2( 22 )( E ) AND IN THE ABSENCE OF INDICATION IN SECTION 2( 22 )( E ) TO EXTEND THE LEGAL FICTION TO A CASE OF LOAN OR ADVANCE TO A NON-SHAREHOLDER ALSO, THE LOAN OR ADVANCE TO A NON-SHAREHOLDER CANNOT BE TAXED AS DEEMED DIVIDEND IN THE HANDS OF A NON- SHAREHOLDER. [PARA 37] THE CONTENTION OF THE REVENUE THAT PROVISIONS OF SE CTION 8( A ) CREATED A FICTION BY WHICH EVEN PAYMENTS TO NON-SHAREHOLDERS COULD BE CONSTRUED AS DIVIDEND COULD NOT BE ACCEPTED. THOSE PROVISIONS MERELY FIX THE YEAR IN WHICH DIVIDEND HAS TO BE TAXED. IT IS, THEREFORE, CLEAR THAT THE SHAREHOLDER ALONE CAN, IF AT ALL, BE SUBJE CTED TO TAX FOR HAVING EARNED DIVIDEND. [PARA 38] 12 FURTHER, IN THE EVENT OF THE PAYMENT OF LOAN OR ADV ANCE 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 ALLO WED TO THE CONCERN, BECAUSE THE CONCERN CAN NEVER RECEIVE DIVIDEND FROM THE COMPANY WHICH IS ONLY PAID TO THE SHAREHOLDER, WHO HAS SUBS TANTIAL INTEREST IN THE CONCERN. THE ABOVE PROVISIONS ALSO, THEREFORE, CONTEMPLATE DEEMED DIVIDEND BEING TAXED IN THE HANDS OF A SHARE HOLDER ONLY. [PARA 40] IN VIEW OF AFORESAID, IT WAS OPINED THAT DEEMED DIV IDEND CAN BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO IS A SHA REHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OT HER THAN A SHAREHOLDER. FURTHER, THE EXPRESSION SHAREHOLDER REFERRED TO IN SECTION 2( 22 )( E ) REFERS TO BOTH A REGISTERED SHAREHOLDER AND BENE FICIAL SHAREHOLDER. IF A PERSON IS A REGISTERED SHAREHOLDE R BUT NOT THE BENEFICIAL SHAREHOLDER THEN THE PROVISIONS OF SECTI ON 2( 22 )( E ) WOULD NOT APPLY. SIMILARLY, IF A PERSON IS A BENEFICIAL S HAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE PROVISIONS OF SECTION 2(22)(E) WOULD NOT APPLY. [PARA 41] IN VIEW OF AFORESAID, THERE WAS NO MERIT IN APPEAL FILED BY THE REVENUE AND, THEREFORE, SAME WAS TO BE DISMISSED. [PARA 42] ABOVE DECISION OF SPECIAL BENCH HAS BEEN FOLLOWED B Y THE ITAT AHMEDABAD BENCH IN THE CASE OF HONEYVICK ENTERPRISE S VS. ACIT IN ITA NO.3424/AHD/2008 ASST. YEAR 2003-04, PRONOUNCED ON 16.3.2009. 21. IN THE PRESENT CASE ALSO THE ASSESSEE COMPANY I S NOT THE SHARE HOLDER IN THE LENDER COMPANY. THEREFORE, FOLLOWING THE ABOVE DECISIONS OF THE TRIBUNAL, THE LOAN/ADVANCES GIVEN BY THE LEN DER COMPANY CANNOT BE TAXED AS DEEMED DIVIDEND IN THE HANDS OF ASSESSEE C OMPANY AS IT IS NOT A SHARE HOLDER IN IT. WE ACCORDINGLY, DECIDE THE ISSU E IN FAVOUR OF THE ASSESSEE. 13 22. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AND PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER WAS PRONOUNCED IN OPEN COURT ON 02/07/2010 SD/- SD/- (MAHAVIR SINGH) (D.C.AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD, DATED : 02/07/2010 MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD