Smt G. Indira Krishna Reddy, Hyderabad V. Dy.CIT., Circle-2(2), Hyderabad

ITA 1496/HYD/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 2504 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-05-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 16-05-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 24-09-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: U MINICHANDRAN
• Assessee Lawyers: RAGHUNATHAN
• Keywords: Capital asset; Share purchase agreement; Rule of consistency; Question of law; Cost of acquisition; Deemed dividend
• Section: 142(1); 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B , HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER I.T.A. NOS. 1495, 1496 & 1497/HYD/2014 ASSESSMENT YEARS: 2007-08, 2008-09 & 2009-10 G. INDIRA KRISHNA REDDY, HYDERABAD. PAN ACGPG 1935 J VS DY. COMMISSIONER OF INCOME-TAX, CIRCLE 2(2), HYDERABAD. (APPELLANT) (RESPONDENT) I.T.A. NOS. 1498, 1499 & 1500/HYD/2014 ASSESSMENT YEARS: 2007-08, 2008-09 & 2009-10 G.V. KRISHNA REDDY, HYDERABAD. PAN ACGPG 1923N VS DY. COMMISSIONER OF INCOME-TAX, CIRCLE 2(2), HYDERABAD. (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI RAGHUNATHAN S FOR REVENUE : SMT. U. MINICHANDRAN DATE OF HEARING : 16-05-2017 DATE OF PRONOUNCEMENT : 24-05-2017 O R D E R PER D.S. SUNDER SINGH, A.M.: ALL THESE APPEALS FILED BY TWO DIFFERENT ASSESSEES (BOTH ARE HUSBAND AND WIFE) ARE DIRECTED AGAINST ORDERS OF CI T(A) III, HYDERABAD, ALL DATED, 30 TH JULY, 2014 FOR THE AYS 2007-08 TO 2009-10. AS IDENTICAL ISSUES ARE INVOLVED IN THESE APPEALS, THEY WERE CLUBBED AND HEARD TOGETHER AND, THEREFORE, WE FIND IT CONVE NIENT TO DISPOSE OF THESE APPEALS BY A CONSOLIDATED ORDER. I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 2 -: 2. AS FACTS AND GROUNDS ARE MATERIALLY IDENTICAL IN ALL THESE APPEALS, WE REFER TO THE FACTS IN AY 2007-08 IN CAS E OF INDIRA KRISHNA REDDY, TO DISPOSE OF THESE APPEALS. 3. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE FILED HER RETURN OF INCOME FOR THE AY 2007-08 ON 31/07/2007 ADMITTIN G TOTAL INCOME OF RS. 2,69,91,657/- BESIDES AGRICULTURAL INCOME OF RS . 3,00,000/- AND SUMMERY ASSESSMENT U/S 143(1) WAS COMPLETED ON 05/0 8/2008. AFTER RECORDING THE REASONS THE CASE WAS REOPENED BY ISSU ING NOTICE U/S 148 OF THE ACT ON 30/03/2013. SUBSEQUENTLY, NOTICES U/S 143(2) AND 142(1) DATED 24/05/2013 WERE ISSUED ALONG WITH SHOW CAUSE TO ASSESS DEEMED DIVIDEND U/S 2(22)(E) IN THE HANDS OF THE AS SESSEE. THE AR OF THE ASSESSEE FILED REPLY DATED 21/06/2014 ON 24/06/ 2013. 3.1 THE ASSESSEE SMT.G. INDIRA KRISHNA REDDY IS HAV ING SHARE HOLDER IN THE COMPANY M/S CASPIAN CAPITAL AND FINAN CE PVT. LTD., MORE THAN 10% AND ALSO SHARE HOLDER IN THE COMPANIE S M/S. METRO ARCHITECTURES & CONTRACTORS PVT. LTD AND M/S ORBIT TRAVELS & TOURS PVT. LTD HAVING SHARE HOLDING OF 20% AND 40% RESPEC TIVELY. AS ON 31.03.06, M/S. METRO ARCHITECTURES & CONTRACTORS PV T. LTD., HAS AUTHORIZED CAPITAL OF RS. 20,00,000/- ISSUED CAPITA L OF RS. 1,00,000/- AND SHARE APPLICATION MONEY PENDING FOR ALLOTMENT R S. 7,17,80,000/-. SIMILARLY, M/S. ORBIT TRAVELS & TOURS PVT. LTD., AL SO AS ON 31.03.2006 HAS AUTHORIZED CAPITAL OF RS. 10,00,000/- ISSUED CA PITAL OF RS.6,00,000/-. IN SPITE OF SUCH HUGE AMOUNT OF SHAR E APPLICATION MONEY PENDING FOR ALLOTMENT AND VERY LESS SCOPE FOR ISSUED CAPITAL IN THE CASE OF SECOND MENTIONED COMPANY, AGAIN M/S CAS PIAN CAPITAL AND FINANCE PVT. LTD., (FORMERLY KNOWN AS GVK CAPIT AL & FINANCE LTD.,) ADVANCED AN AMOUNT OF RS.36.10 LAKHS AND 15. 00 LAKHS DURING THE YEAR IN THE GUISE OF SHARE APPLICATION MONEY TO M/S. METRO ARCHITECTURE & CONTRACTORS PVT LTD AND ORBIT TRAVEL S & TOURS PVT LTD., RESPECTIVELY. I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 3 -: 3.2. DURING THE ASSESSMENT PROCEEDINGS THE ASSESSE E FILED REPLY TO THE SHOW CAUSE/ OBJECTIONS IN VARIOUS DATES. THE SA ME WERE SUMMARIZED IN THE ASSESSMENT ORDER, AS UNDER. 1. ALL THE MATERIAL FACTS WERE AVAILABLE WITH ASSES SING OFFICER IN RELATION TO THE SHARE APPLICATION MONEY AND INVESTM ENT DETAILS DURING THE ORIGINAL ASSESSMENT. 2. LEGITIMATE BUSINESS TRANSACTIONS CANNOT BE RE-CH ARACTERIZED. 3. THERE IS NO REQUIREMENT UNDER ANY LAW TO HAVE AD EQUATE AUTHORIZED CAPITAL AT THE TIME OF RECEIVING SHARE A PPLICATION MONEY. 4. DEEMING PROVISIONS SHOULD BE INTERPRETED STRICTL Y. 5. THE HON'BLE DELHI HIGH COURT IN THE CASE OF SUNI L CHOPRA (201 TAXMAN 316) CANNOT BE RELIED UPON. 6. DEEMED DIVIDEND TO BE TAXED IN THE HANDS OF THE RECIPIENT COMPANY AND NOT IN THE HANDS OF THE SHARE HOLDER. D EEMED DIVIDEND WOULD ARISE ONLY IN THE EVENT OF PARTING O F THE FUNDS BY THE COMPANY IN FAVOR OF THE SHARE HOLDER. 3.3 THE ASSESSEE STATED THAT DETAILS OF INVESTMENT S ALONG WITH SHARES HELD IN ALL THE COMPANIES WERE SUBMITTED DUR ING THE ORIGINAL ASSESSMENT PROCEEDINGS. FURTHER, STATED THAT DURING THE COURSE OF ASSESSMENT OF M/S CASPIAN CAPITAL, THE COMPANY HAD SUBMITTED SHARE APPLICATION MONEY PAID TO RECIPIENT COMPANY ALONG W ITH DETAILS OF SHARE HOLDERS. THUS THE AO HAD ALL THE MATERIAL AND HE HAS OF THE VIEW THAT SECTION 2(22)(E) DID NOT GET ATTRACTED IN THIS CASE. FURTHER, SHE STATED THAT SUBSEQUENT ASSESSMENT YEARS I.E., 2007- 08 TO 2009-10, THERE IS NO CHANGE IN THE FACTS, FOLLOWING THE RULE OF CONSISTENCY, A DIFFERENT VIEW COULD NOT BE TAKEN AND RELIED IN SO ME CASE LAWS. 3.4 AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE AND REFERRING TO THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT AS WELL AS EXAMINING THE ISSUE WITH VARIOUS CASE LAW, THE AO OBSERVED AS UNDER: I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 4 -: 10.4. IN THE INSTANT CASE, THE ASSESSEE SMT.G. IND IRA KRISHNA REDDY IS HAVING SHARE HOLDER IN THE COMPANY M/S CAS PIAN CAPITAL AND FINANCE PVT. LTD., MORE THAN 10% AND ALSO SHARE HOLDER IN THE COMPANIES M/S. METRO ARCHITECTURES & CONTRACTOR S PVT LTD AND M/S ORBIT TRAVELS & TOURS PVT LTD HAVING SHARE HOLD ING OF 20% AND 40% RESPECTIVELY. AS ON 31.03.06, METRO ARCHIT ECTURES & CONTRACTORS PVT LTD., HAS AUTHORISED CAPITAL OF RS. 20,00,000/- ISSUED CAPITAL OF RS.1,00,000/- AND SHARE APPLICATI ON MONEY PENDING FOR ALLOTMENT RS.7,17,80,000/-. SIMILARLY, M/S. ORBIT TRAVELS & TOURS PVT LTD., ALSO AS ON 31.03.2006 HAS AUTHORISED CAPITAL OF RS. 10,00,000/- ISSUED CAPITAL OF RS.6,0 0,000/-. IN SPITE OF SUCH HUGE AMOUNT OF SHARE APPLICATION MONEY PEND ING FOR ALLOTMENT AND VERY LESS SCOPE FOR ISSUED CAPITAL IN THE CASE OF SECOND MENTIONED COMPANY, AGAIN M/S CASPIAN CAPITAL AND FINANCE PVT. LTD., (FORMERLY KNOWN AS GVK CAPITAL & FINANCE LTD.,) ADVANCED AN AMOUNT OF RS.36.10 LAKHS AND 15. 00 LAKHS DURING THE YEAR IN THE GUISE OF SHARE APPLICATION M ONEY TO M/S. METRO ARCHITECTURE & CONTRACTORS PVT LTD AND ORBIT TRAVELS & TOURS PVT LTD., RESPECTIVELY. TH PAYER COMPANY IS A LSO HAVING ACCUMULATED PROFITS AN AMOUNT OF RS. 4,01,18,158/- 10.5. THE FACT THAT THE AUTHORIZED CAPITAL OF THE A BOVE MENTIONED COMPANY SUBSTANTIALLY LOW WHEN COMPARED TO THE SHAR E APPLICATION MONEY RECEIVED BY IT COUPLED WITH THE F ACT THAT THE SHARES ARE YET TO BE ALLOTTED PROVES THAT THE AMOUN T ADVANCED BY M/ S. CASPIAN CAPITAL AND FINANCE P LTD THOUGH TERM ED AS SHARE APPLICATION MONEY, IS IN FACT IN THE NATURE OF UNSE CURED LOAN. CONSEQUENTLY, THE AMOUNT ADVANCED BY M/S CASPIAN CA PITAL AND FINANCE P LTD. TO M/S. METRO ARCHITECTURES & CONTRA CTORS PVT LTD AND M/S ORBIT TRAVELS & TOURS PVT LTD IS ASSESSABLE AS DEEMED DIVIDEND IN THE HANDS OF SMT. INDIRA KRISHNA REDDY FOR THE A.Y 2007-08 IN ACCORDANCE WITH THE PROVISIONS OF SECTIO N 2(22)(E) OF THE ACT. THEREFORE, AN AMOUNT OF RS 51,10,000/- ADD ED TO THE RETURNED INCOME OF THE ASSESSEE. 4. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE P REFERRED AN APPEAL BEFORE THE CIT(A) AND CONTENDED THAT THE COM PANY M/S CASPIAN CAPITAL AND FINANCE PVT. LTD. IS AN INVEST MENT HOLDING COMPANY AND IS IN THE BUSINESS OF INVESTING SHARES OF AUTHORIZED GROUP COMPANIES AND FURTHER STATED THAT THE SAID TR ANSACTION WAS A PURELY COMMERCIAL AND LEGITIMATE BUSINESS TRANSACTI ON. 4.1 THE AR OF THE ASSESSEE STATED THAT THE AO CONSI DERED THE ENTIRE SHARE APPLICATION MONEY AS DEEMED DIVIDEND U/S 2(22 )(E) IN THE HANDS I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 5 -: OF THE ASSESSEE AS WELL AS IN THE HANDS OF THE ASSE SSEES HUSBAND WHICH WOULD LEAD TO DOUBLE TAXATION. HE FURTHER STA TED THAT IT SHOULD BE RESTRICTED TO THE EXTENT OF ASSESSEES SHARE HOLDIN G IN THE RECIPIENT COMPANIES. 5. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E, THE CIT(A) OBSERVED THAT THE COMPANY M/S CASPIAN CAPITAL AND F INANCE PVT. LTD. HAS ADVANCED LOAN IN THE GUISE OF SHARE APPLICATION MONEY. THEREFORE, THE QUESTION OF INTERPRETATION OF DEEMING FICTION U /S 2(22)(E) DIRECTLY DOES NOT ARISE. MERELY, BECAUSE MAKING ENTRY IN THE BOOKS DOES NOT CHANGE ITS TRUE CHARACTER OF TRANSACTION. THE WAY I N WHICH ENTRIES ARE MADE BY AN ASSESSEE IN HIS BOOKS OF ACCOUNT IS NOT DETERMINATIVE. WHAT IS NECESSARY TO BE CONSIDERED THE IS THE TRUE NATURE OF THE TRANSACTION. FOR THIS PROPOSITION, THE CIT(A) RELIE D ON THE DECISION IN THE CASE OF SUTLEJ COTTON MILLS LTD., VS. CIT (SC) 116 ITR 1. 5.1 THE CIT(A) DIRECTED THE AO TO APPORTION THE ENT IRE ADVANCED AMOUNT IN THE HANDS OF SHRI G.V. KRISHNA REDDY AND HIS SPOUSE MRS. INDIRA KRISHNA REDDY AS PER THE SHARE HOLDING PATTE RN OF SHI GV KRISHNA REDDY AND MRS. INDIRA KRISHNA REDDY IN THE PAYER COMPANY I.E. CASPIAN CAPITAL (PVT.) LTD. HOWEVER, SUCH AN A PPORTIONMENT IS SUBJECT TO THAT IF IT WAS TAXED IN BOTH THE HANDS I .E. ASSESSEE AND HER HUSBAND, THE APPORTIONMENT IS TO BE DONE. IN CASE T HERE WAS NO SUCH TAXATION IN BOTH THE HANDS, THE QUESTION OF APPORTI ONMENT OF THE SAME DOES NOT OBVIOUSLY ARISE. 6. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL, WHICH ARE COMMON IN ALL THE APPEALS, EXCEPT THE DIFFERENCE IN QUANTU M OF ADDITIONS: 1. THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APP EALS)-III, HYDERABAD DATED 30-072014 IS ERRONEOUS, CONTRARY TO LAW AND FACTS OF THE CASE. I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 6 -: 2. A) THE COMMISSIONER OF INCOME TAX (APPEALS) ERRE D IN CONFIRMING ADDITION OF RS.25,55,000/- OUT OF RS.51, 1 0,000/- MADE U/S.2(22)(E) BY THE ASSESSING OFFICER STATING THAT THE ASSESSING OFFICER IS JUSTIFIED IN CONSIDERING SHARE APPLICATI ON MONEY MADE BY THE CASPIAN CAPITAL AND FINANCE PVT LTD WITH COM PANIES (I) METRO ARCHITECTS & CONTRACTORS PVT LTD AND (II) ORB IT TRAVEL & TOURS PVT LTD AS DEEMED DIVIDEND U/S.2(22)(E). B) THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT T O HAVE SEEN THAT THE APPELLANT DID NOT RECEIVE ANY PAYMENT FROM CASPIAN CAPITAL AND FINANCE PVT LTD AND THEREFORE ERRED IN CONFIRMING THE ADDITION MADE U/S.2(22)(E) AS DEEMED DIVIDEND. 3) FOR ALL OF THE ABOVE AND SUCH OTHER GROUNDS AS M AY BE URGED AT THE TIME OF HEARING IT IS MOST RESPECTFULLY PRAYED THAT THE HON'BLE TRIBUNAL MAY KINDLY DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS.25,55,000/- SUSTAINED BY THE COMMISS IONER OF INCOME TAX OUT OF RS.51,10,000/- MADE BY THE ASSESS ING OFFICER AS DEEMED DIVIDEND U/S.2(22)(E) IN THE INTEREST OF JUSTICE. 6.1 THE ASSESSEE HAS RAISED THE FOLLOWING ADDITIONA L GROUNDS OF APPEAL: 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCE OF TH E CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN UPHOLDING THAT THE ACTION OF LD. AO IN NOT CONSIDERING/FOLLOWING THE CBDT CIRCULAR N O 495 OF 1987 DATED 22 SEPTEMBER 1987 WHICH WAS BINDING ON THE LD . AO. 5. WITHOUT PREJUDICE TO GROUNDS 1 TO 4 ABOVE, THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A ) HAS ERRED IN NOT RESTRICTING THE ADDITION UNDER SECTION 2(22)(E) OF THE INCOME TAX ACT, 1961 PROPORTIONATE TO THE EXTENT OF APPELL ANT'S SHAREHOLDING IN EACH OF METRO ARCHITECTURES & CONTR ACTORS PRIVATE LIMITED AND ORBIT TRAVELS & TOURS PRIVATE LIMITED. 7. BEFORE US, THE LD. AR OF THE ASSESSEE HAS NOT AD VANCED ANY ARGUMENT ON THE GROUND NOS. 1 TO 3, THEREFORE, THE SAME ARE DISMISSED AS NOT PRESSED. 8. AS REGARDS GROUND NO. 4, RAISED AS ADDITIONAL GR OUND, THE LD. AR SUBMITTED THAT DIFFERENT LIMBS TO PROVISIONS OF SEC TION 2(22)(E) OF THE ACT WHICH PROVIDES THAT ANY LOAN OR ADVANCES MADE B Y A CLOSELY HELD COMPANY: I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 7 -: (I) TO A SHAREHOLDER WHO IS THE BENEFICIAL OWNER OF SHARES HOLDING 10% OR MORE EQUITY SHARES IN SUCH CLOSELY HELD COMPANY; OR (II) TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR PARTNER AND IS BENEFICIALLY ENTITLED 20% OR MORE OF THE INC OME OF THE SUCH CONCERN; OR (III) ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF SUCH SHAREHOLDER SHALL BE DEEMED AS DIVIDEND. 8.1 HE SUBMITTED THAT EVEN IF FOR THE SAKE OF ARGUM ENT, SHARE APPLICATION MONEY MADE BY CASPIAN TO RECIPIENT COMP ANY IS DEEMED TO BE LOANS AND ADVANCES AND THUS TO BE DEEMED AS DIVI DEND, IN VIEW OF SECOND LIMB TO PROVISIONS OF SECTION 2(22)(E) OF TH E ACT, A VITAL QUESTION ARISES AS IN WHOSE HANDS SUCH LOAN AND ADV ANCES SHOULD BE DEEMED AS DIVIDEND. IT MAY BE NOTED THAT THE AFORES AID PROVISION PROVIDES LOANS AND ADVANCES SHOULD BE REGARDED AS D EEMED DIVIDEND, BUT, IT DOES NOT PROVIDE IN WHOSE HANDS IT SHOULD B E REGARDED AS DIVIDEND. THEREFORE, WHETHER SUCH LOANS AND ADVANCE S SHOULD BE REGARDED AS DIVIDEND IN HANDS OF THE CONCERN RECEIV ING THE LOANS AND ADVANCES OR IN THE HANDS OF SUCH SHAREHOLDER NEEDS TO BE ANALYZED. IN THIS REGARD, HE REFERRED TO CIRCULAR NO. 495 OF 1987 DATED 22 SEPTEMBER 1987 ISSUED BY CBDT, WHEREIN THE CBDT HAS CLARIFIED THAT THE DIVIDEND UNDER SECOND LIMB TO PROVISIONS OF SEC TION 2(22)( E) OF THE ACT IS TO BE TAXED IN HANDS OF THE CONCERN RECEIVIN G THE LOANS AND ADVANCES. RELEVANT EXTRACT OF THE CIRCULAR IS PRODU CED BELOW: '10.3 THE NEW PROVISION WOULD, THEREFORE, BE APPLIC ABLE IN A CASE WHERE A SHAREHOLDER HAS 10 PER CENT OR MORE OF THE EQUITY CAPITAL. FURTHER, DEEMED DIVIDEND WOULD HE TAXED IN THE HAND S OF A CONCERN WHERE ALL THE FOLLOWING CONDITIONS ARE SATI SFIED: (I) WHERE THE COMPANY MAKES THE PAYMENT BY WAY OF LOANS OR AD VANCES TO A CONCERN ; (II) WHERE A MEMBER OR A PARTNER OF THE C ONCERN HOLDS 10 PER CENT OF THE VOTING POWER IN THE COMPANY; AND (III) WHERE THE MEMBER OR PARTNER OF THE CONCERN IS ALSO BENEFI CIALLY ENTITLED TO 20 PER CENT OF THE INCOME OF SUCH CONCERN. WITH A VIEW TO AVOID THE HARDSHIP IN CASES WHERE ADVANCES OR LOANS HAVE ALREADY BEEN GIVEN, THE NEW PROVISIONS HAVE BEEN MADE APPLICABLE ONLY IN I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 8 -: CASES WHERE LOANS OR ADVANCES ARE GIVEN AFTER 31ST MAY, 1987. THESE AMENDMENTS WILL APPLY IN RELATION TO ASSESSME NT YEAR 1988-89 AND SUBSEQUENT YEARS. ' 8.2 REFERRING TO THE ABOVE CIRCULAR, THE LD. AR SUB MITTED THAT THE EXPLANATION IN THE AFORESAID CIRCULAR CLEARLY PROVI DES THAT DEEMED DIVIDEND IS TO BE TAXED IN THE HANDS OF THE CONCERN IN RECEIPT OF LOANS AND ADVANCES RATHER THAN IN THE HANDS OF THE SHAREH OLDER, UNLESS, THE SHAREHOLDER ITSELF RECEIVES THE LOAN. HOWEVER, THE LOWER AUTHORITIES IN THE INSTANT CASE, WITHOUT CONSIDERING THE CBDT CIRC ULAR, HAS TAXED SHARE APPLICATION MONEY AS DEEMED DIVIDEND UNDER SE CTION 2(22)(E) OF THE ACT IN HAND OF THE APPELLANT. IF THE ACTION OF THE LD. AO IS ACCEPTED IT WILL GIVE ARISE TO SEVERAL ADMINISTRATIVE ISSUES . 8.3 FURTHER, THE LD. AR RELIED ON THE DECISION OF T HE HON'BLE APEX COURT IN THE CASE OF GOPAL AND SONS (HUF) -VS.- CIT [2017/ 77 TAXMANN.COM 71 (SC) WHEREIN IT HAS BEEN HELD THAT D EEMED DIVIDEND IS TAXABLE IN THE HANDS OF THE CONCERN RECEIVING TH E LOAN AND ADVANCES. IN THE SAID CASE, HUF WAS HOLDING BENEFIC IAL INTEREST IN THE SHARES OF PAYER COMPANY WHEREAS SHARES WERE REGISTE RED IN THE NAME OF KARTA OF THE HUF. THE HUF RECEIVED CERTAIN LOAN AND ADVANCES FROM THE PAYER COMPANY. THE APEX COURT HELD THAT EVEN IF HUF IS NOT A REGISTERED SHAREHOLDER OF PAYER COMPANY, AS PER PRO VISIONS OF SECTION 2(22)(E) OF THE ACT, ONCE THE PAYMENT IS RECEIVED B Y THE HUF AND THE SHAREHOLDER (I.E. KARTA) IS A MEMBER OF THE HUF AND HE ALSO HOLDS SUBSTANTIAL INTEREST (I.E. 20 PERCENT OR MORE) IN T HE HUF, THE LOAN! ADVANCE MADE BY THE PAYER COMPANY TO THE HUF SHALL CONSTITUTE DEEMED DIVIDEND IN THE HANDS OF HUF. THE RELEVANT P ARAS OF THE SAID JUDGMENT IS REPRODUCED BELOW: 16. IN THE INSTANT CASE, THE PAYMENT IN QUESTION IS MADE TO THE ASSESSEE WHICH IS A HUF. SHARES ARE HELD BY SHRI. G OPAL KUMAR SANEI, WHO IS KARTA OF THIS HUF. THE SAID KARTA IS, UNDOUBTEDLY, THE MEMBER OF HUF. HE ALSO HAS SUBSTANTIAL INTEREST IN THE ASSESSEE/HUF, BEING ITS KARTA. IT WAS NOT DISPUTED THAT HE WAS ENTITLED TO NOT LESS THAN 20% OF THE INCOME OF HUF. IN VIEW OF THE I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 9 -: AFORESAID POSITION. PROVISIONS OF SECTION 2(22) (E) OF THE ACT GET ATTRACTED AND IT IS NOT EVEN NECESSARY TO DETERMINE AS TO WHETHER HUF CAN. IN LAW. BE BENEFICIAL SHAREHOLDER OR REGIS TERED SHAREHOLDER IN A COMPANY. 17. IT IS ALSO FOUND AS A FACT, FROM THE AUDITED AN NUAL RETURN OF THE COMPANY FILED WITH ROC THAT THE MONEY TOWARDS SHARE HOLDING IN THE COMPANY WAS GIVEN BY THE ASSESSEE/HUF. THOUGH, THE SHARE CERTIFICATES WERE ISSUED IN THE NAME OF THE KARTA, SHRI GOPAL KUMAR SANEI, BUT IN THE ANNUAL RETURNS, IT IS THE H UF WHICH WAS SHOWN AS REGISTERED AND BENEFICIAL SHAREHOLDER. IN ANY CASE, IT CANNOT BE DOUBTED THAT IT IS THE BENEFICIAL SHAREHO LDER. EVEN IF WE PRESUME THAT IT IS NOT A REGISTERED SHAREHOLDER. AS PER THE PROVISIONS OF SECTION 2(22)(E) OFTHE ACT. ONCE THE PAYMENT IS RECEIVED BY THE HUF AND SHAREHOLDER (MR. SANEI. KAR TA. IN THIS CASE) IS A MEMBER OF THE SAID HUF AND HE HAS SUBSTA NTIAL INTEREST IN THE HUF. THE PAYMENT MADE TO THE HUF SHALL CONST ITUTE DEEMED DIVIDEND WITHIN THE MEANING OF CLAUSE (E) OF SECTIO N 2(22) OF THE ACT. THIS IS THE EFFECT OF EXPLANATION 3 TO THE SAI D SECTION. AS NOTICED ABOVE. THEREFORE. IT IS NO GAINSAYING THAT SINCE HUF ITSELF IS NOT THE REGISTERED SHAREHOLDER. THE PROVISIONS O F DEEMED DIVIDEND ARE NOT ATTRACTED. FOR THIS REASON, JUDGME NT IN CP. SARATHY MUDALIAR, RELIED UPON BY THE LEARNED COUNSE L FOR THE APPELLANT, WILL HAVE NO APPLICATION. THAT WAS A JUD GMENT RENDERED IN THE CONTEXT OF SECTION 2(6-A)(E) OF THE INCOME T AX ACT, 1922 WHEREIN THERE WAS NO PROVISION LIKE EXPLANATION 3. 8.4 FURTHER, LD. AR SUBMITTED THAT THE CHARGING PRO VISION DOES NOT SPECIFICALLY PROVIDES AS TO HOW THE INCOME SHOULD B E COMPUTED IN THE HANDS OF SHAREHOLDERS. AS HELD IN VARIOUS JUDICIAL PRONOUNCEMENT THAT IN THE ABSENCE OF COMPUTATION MECHANISM THE CHARGIN G PROVISIONS FAILS. GIVEN THE SAME, IN THE ABSENCE OF ANY PRESCR IBED MECHANISM FOR COMPUTATION OF DIVIDEND IN THE HANDS OF SHAREHOLDER S, THE CHARGING PROVISION FAILS AND ACCORDINGLY NO DIVIDEND WOULD B E ASSESSABLE IN THE HANDS OF SHAREHOLDERS. IN THIS CONNECTION, HE RELIE D ON THE FOLLOWING DECISIONS: (I) HON'BLE APEX COURT IN THE CASE OF CIT -VS. - B. C. SRINIVASA SHETTY (1981) 128 ITR 294 (SC) HELD THAT UNDER THE SCHEME OF INCOME-TAX ACT, 1961 CHARGE OF TAX WILL NOT GET ATTRACTED UNLE SS THE CASE OR TRANSACTION FALLS UNDER THE GOVERNANCE OF THE RELEV ANT COMPUTATION PROVISIONS. THE APEX COURT HELD AS UNDER: I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 10 -: 'THE CHARACTER OF THE COMPUTATION PROVISIONS IN EAC H CASE BEARS A RELATIONSHIP TO THE NATURE OF THE CHARGE. THUS, THE CHARGING SECTION AND THE COMPUTATION PROVISIONS TOGETHER CON STITUTE AN INTEGRATED CODE. WHEN THERE IS A CASE TO WHICH THE COMPUTATION PROVISIONS CANNOT APPLY AT ALL, IT IS EVIDENT THAT SUCH A CASE WAS NOT INTENDED TO FALL WITHIN THE CHARGING. SECTION. OTHERWISE, ONE WOULD BE DRIVEN TO CONCLUDE THAT WHILE A CERTAIN IN COME SEEMS TO FALL WITHIN THE CHARGING SECTION, THERE IS NO SCHEM E OF COMPUTATION OF FOR QUANTIFYING IT. THE LEGISLATIVE PATTERN DISC ERNIBLE IN THE ACT IS AGAINST SUCH CONCLUSION. IT MUST BE BORNE IN MIN D THAT THE LEGISLATIVE INTENT IS PRESUMED TO RUN UNIFORMLY THR OUGH THE ENTIRE CONSPECTUS OF PROVISIONS PERTAINING TO EACH HEAD ON INCOME. ' 9. AS REGARDS GROUND NO. 5, THE LD. AR SUBMITTED TH AT THE METHOD OF COMPUTING THE DEEMED DIVIDEND TAXABLE AS DIRECTED B Y THE CIT(A) TO THE TAX OFFICER IS WITHOUT ANY BASIS. HE SUBMITTED THAT IT IS WELL SETTLED LAW THAT THE CONSTRUCTION WHICH ADVANCES THE OBJECT OF LEGISLATION SHOULD BE MADE AND NOT THE ONE WHICH DEFEATS THE SA ME. ACCORDINGLY, IN THE ABSENCE OF ANY COMPUTATION MECHANISM PROVIDE D, THE AMOUNT SHOULD BE APPORTIONED IN SUCH A MANNER THAT DO NOT LEAD TO INJUSTICE TO THE ANY TAX PAYER. FURTHER, THE FORMULAE FOR ALLOCA TION OF LOAN AS DEEMED DIVIDEND SHOULD BE CONSTANT/SAME FOR ANY SCE NARIOS AND CANNOT BE ALTERED TO SUIT THE INTENT OF THE REVENUE . HE SUBMITTED THAT THE AMOUNT OF DEEMED DIVIDEND ASSESSABLE IN THE HAN DS OF THE APPELLANT SHOULD NOT BE DEPENDENT ON THE SHAREHOLDI NG OF THE OTHER SHAREHOLDERS. THE LD. CIT (APPEALS) HELD THAT WHERE AMOUNT HAS BEEN TAXED EITHER IN THE HANDS OF THE APPELLANT OR SPOUS E OF THE APPELLANT, THE ENTIRE AMOUNT TO BE TAXED IN HANDS OF THE APPEL LANT OR MR. REDDY, AS THE CASE MAY BE. IN THIS REGARD, THE LD. AR RELI ED ON DECISION OF HON'BLE DELHI TRIBUNAL IN THE CASE OF PUNEET BHAGAT -VS.- ITO [2016/157 LTD 353 (DELHI - TRIB.) WHEREIN IT WAS HE LD THAT DEEMED DIVIDEND WOULD BE ASSESSABLE IN THE HANDS OF SHAREH OLDERS TO PROPORTIONATE SHAREHOLDING OF THE SHAREHOLDERS IN T HE RECIPIENT ENTITY. I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 11 -: 10. LD. DR, ON THE OTHER HAND, SUBMITTED THAT THE C IRCULAR NO. 495, ON WHICH RELIANCE PLACED BY THE ASSESSEE, WAS ISSUE D IN 1987 AND SUBSEQUENT TO THE SAID CIRCULAR, THERE ARE LOT OF D ECISIONS RENDERED BY VARIOUS COURTS INTERPRETING THE STATUTE AND HELD TH AT DEEMED DIVIDEND SHOULD BE TAXED IN THE HANDS OF SHAREHOLDER AND NOT IN THE HANDS OF RECIPIENT/CONCERN. THE DECISION OF GOPAL AND SONS ( HUF) (SUPRA) RELIED ON BY THE ASSESSEE IS RELATED TO HUF. SHE SU BMITTED THAT IN THE CASE OF INDIVIDUAL, HUF CANNOT BE A SHAREHOLDER, BU T, THE KARTA IS A SHAREHOLDER. THE HONBLE SUPREME COURT WHILE RENDER ING THE DECISION IN THE SAID CASE, HELD THAT EVEN IF HUF IS NOT A RE GISTERED SHAREHOLDER OF PAYER COMPANY, AS PER THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT, ONCE THE PAYMENT IS RECEIVED BY THE HUF AND THE SHA REHOLDER (I.E. KARTHA) IS A MEMBER OF THE HUF AND HE ALSO HOLDS SU BSTANTIATE INTEREST IN THE HUF, THE LOAN/ADVANCE MADE BY THE P AYER COMPANY TO THE HUF SHALL CONSTITUTE DEEMED DIVIDEND IN THE HAN DS OF HUF. SHE, THEREFORE, SUBMITTED THAT THE SAID CASE IS NOT APPL ICABLE TO THE FACTS OF THE CASE. SHE FURTHER ARGUED THAT THE SPECIAL BENC H DECISION OF MUMBAI TRIBUNAL IN THE CASE OF ACIT VS. BHAUMIK COL OUR PVT. LTD., 313 ITR (AT) 146 IS SQUARELY APPLICABLE TO THE FACT S OF THE ASSESSEES CASE. ACCORDINGLY, LD. DR CONTENDED THAT DIVIDEND INCOME SHOULD BE TAXED IN THE HANDS OF THE ASSESSEE BEING A SHAREHOL DER AND NOT IN THE HANDS OF CONCERN. 11. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD AS WELL AS THE CASE LAW CITED AT THE BAR. THE AO HELD THAT THE AMOUNT ADVANCED BY M/S CASPIAN CAPITAL AND FINA NCE P. LTD. TO M/S METRO ARCHITECTURES & CONTRACTORS PVT. LTD. AND M/S ORBIT TRAVELS & TOURS PVT. LTD., IS ASSESSABLE AS DEEMED DIVIDEND IN THE HANDS OF ASSESSEE FOR THE AY 2007-08 IN ACCORDANCE WITH THE PROVISIONS OF SECTION 2(22)(E) AS THE ASSESSEE IS A SHAREHOLDER H AVING 10%, 20% & 40% RESPECTIVELY IN THE SAID COMPANIES. THE CIT(A) UPHELD THE ACTION OF THE AO. I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 12 -: 11.1 THE HON'BLE DELHI HIGH COURT IN CASE OF CIT VS . ANKITECH P. LTD. (SUPRA) WHILE CONSIDERING IDENTICAL ISSUE APPROVED THE DECISION OF THE ITAT, MUMBAI SPECIAL BENCH IN CASE OF BHAUMIC COLOU RS (P) LTD., 313 ITR (AT) 146 AND HELD AS UNDER: '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 F OR MAKING PROVISION APPLICABLE. IN COMMISSIONER OF INCOME TAX VS. C.P. SARATHY MUDALIAR[1972] 83 ITR 170, THE SUPREME COUR T HAD TRACED OUT THE ASSESSEE OF THIS PROVISION IN THE FO LLOWING MANNER: ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WH ICH THE PUBLIC ARE SUBSTANTIALLY INTEREST, OF ANY SUM (WHET HER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MADE AFTER 31.05.19987 BY WAY OF ADVANCE OR LOAN. FIRST LIMB A) TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENE FICIAL OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVI DEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDI NG NOT LESS THAN TEN PERCENT 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 PR OFITS. 23. IT IS RIGHTLY POINTED OUT BY THE BOMBAY HIGH CO URT IN UNIVERSAL MEDICARE (P) LTD.(SUPRA)THAT SECTION 2(22)(E) OF TH E ACT IS NOT ARTISTICALLY WORDED. BE AS IT MAY, WE MAY REITERATE THAT AS PER THIS PROVISION, THE FOLLOWING CONDITIONS ARE TO BE SATIS FIED: (1) THE PAYER COMPANY MUST BE A CLOSELY HELD COMPAN Y. (2) IT APPLIES TO ANY SUM PAID BY WAY OF LOAN OR AD VANCE DURING THE YEAR TO THE FOLLOWING PERSONS: (A) A SHAREHOLDER HOLDING AT LEAST 10 OF VOTING POW ER IN THE PAYER COMPANY. (B) A COMPANY IN WHICH SUCH SHAREHOLDER HAS AT LEAS T 20% OF THE VOTING POWER. (C) A CONCERN (OTHER THAN COMPANY) IN WHICH SUCH SH AREHOLDER HAS AT LEAST 20% INTEREST. I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 13 -: (3) THE PAYER COMPANY HAS ACCUMULATED PROFITS ON TH E 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 SEC TION 2(22)(E) IS THAT CLOSELY HELD COMPANIES (I.E. COMPANIES IN WHIC H 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 M/S. ACE TYRES LIMITED, BACHUPALLY, RANGA REDDY DISTRICT DIVIDEND BECAUSE I F SO DISTRIBUTED THE DIVIDEND INCOME WOULD BECOME TAXABL E IN THE HANDS OF THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED PROFITS AS DIVIDEND, COMPANIES DISTRIBUTE THEM AS L OAN OR ADVANCES TO SHAREHOLDERS OR TO CONCERN IN WHICH SUC H SHAREHOLDERS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHA REHOLDER. IN SUCH AN EVENT, BY THE DEEMING PROVISIONS, SUCH PAYMENT B Y THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION BEHIN D 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 CON CERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST, IS BASED ON THE PRESUMPTION THAT THE LOANS OR ADVANCES WOULD ULTIMA TELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. 25. FURTHER, IT IS AN ADMITTED CASE THAT UNDER NORM AL 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 RELA TES TO 'DIVIDEND'. THUS, BY A DEEMING PROVISION, IT IS THE DEFINITION OF DIVIDEND WHICH IS ENLARGED. LEGAL FICTION DOES NOT EXTEND TO 'SHAR EHOLDER'. WHEN WE KEEP IN MIND THIS ASPECT, THE CONCLUSION WOULD B E OBVIOUS, VIZ., LOAN OR ADVANCE GIVEN UNDER THE CONDITIONS SP ECIFIED UNDER SECTION 2(22)(E) OF THE ACT WOULD ALSO BE TREATED A S DIVIDEND. THE FICTION HAS TO STOP HERE AND IS NOT TO BE EXTENDED FURTHER FOR BROADENING THE CONCEPT OF SHAREHOLDERS BY WAY OF LE GAL FICTION. IT IS A COMMON CASE THAT ANY COMPANY IS SUPPOSED TO DI STRIBUTE THE PROFITS IN THE FORM OF DIVIDEND TO ITS SHAREHOLDERS /MEMBERS AND SUCH DIVIDEND CANNOT BE GIVEN TO NON-MEMBERS. THE S ECOND CATEGORY SPECIFIED UNDER SECTION 2(22)(E) OF THE AC T, VIZ., A CONCERN (LIKE THE ASSESSEE HEREIN), WHICH IS GIVEN THE LOAN OR ADVANCE IS ADMITTEDLY NOT A SHAREHOLDER/MEMBER OF T HE PAYER COMPANY. THEREFORE, UNDER NO CIRCUMSTANCE, IT COULD BE TREATED AS SHAREHOLDER/MEMBER RECEIVING DIVIDEND. IF THE IN TENTION OF THE LEGISLATURE WAS TO TAX SUCH LOAN OR ADVANCE AS DEEM ED DIVIDEND I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 14 -: AT THE HANDS OF 'DEEMING SHAREHOLDER', THEN THE LEG ISLATURE WOULD HAVE INSERTED DEEMING PROVISION IN RESPECT OF SHARE HOLDER 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 S HAREHOLDER BY WAY OF DEEMING PROVISION. IT IS NOT CORRECT ON THE PART OF THE REVENUE TO ARGUE THAT IF THIS POSITION IS TAKEN, TH EN 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 LEARNE D COUNSELS FOR THE REVENUE ON THE BASIS OF SECTIONS 4, 5, 8, 14 AN D 56 OF THE ACT WOULD BE OF NO AVAIL. SIMPLE ANSWER TO THIS ARGUMEN T IS THAT SUCH LOAN OR ADVANCE, IN THE FIRST PLACE, IS NOT AN INCO ME. SUCH A LOAN OR ADVANCE HAS TO BE RETURNED BY THE RECIPIENT TO T HE COMPANY, WHICH HAS GIVEN THE LOAN OR ADVANCE. 27. PRECISELY, FOR THIS VERY REASON, THE COURTS HAV E HELD THAT IF THE AMOUNTS ADVANCED ARE FOR BUSINESS TRANSACTIONS BETW EEN THE PARTIES, SUCH PAYMENT WOULD NOT FALL WITHIN THE DEE MING DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. 28. INSOFAR AS RELIANCE UPON CIRCULAR NO. 495 DATED 22.09.1997 ISSUED BY CENTRAL BOARD OF DIRECT TAXES IS CONCERNE D, WE ARE INCLINED TO AGREE WITH THE OBSERVATIONS OF THE MUMB AI BENCH DECISION IN BHAUMIK COLOUR (P) LTD. (SUPRA)THAT SUC H OBSERVATIONS ARE NOT BINDING ON THE COURTS. ONCE IT IS FOUND THA T 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 W OULD BE OF NO AVAIL. 29. NO DOUBT, THE LEGAL FICTION/DEEMED PROVISION CR EATED BY THE LEGISLATURE HAS TO BE TAKEN TO 'MAGIGICAL CONCLUSIO N' AS HELD IN ANDALEEB SEHGAL (SUPRA). THE REVENUE WANTS THE DEEM ING PROVISION TO BE EXTENDED WHICH IS ILLOGICAL AND ATT EMPT IS TO CREATE A REAL LEGAL FICTION, WHICH IS NOT CREATED BY THE L EGISLATURE. WE SAY AT THE COST OF REPETITION THAT THE DEFINITION O F SHAREHOLDER IS NOT ENLARGED BY ANY FICTION. 30. BEFORE WE PART WITH, SOME COMMENTS ARE TO BE NE CESSARILY MADE BY US. AS POINTED OUT ABOVE, IT IS NOT IN DISP UTE THAT THE CONDITIONS STIPULATED IN SECTION 2(22)(E) OF THE AC T TREATING THE LOAN AND ADVANCE AS DEEMED DIVIDEND ARE ESTABLISHED IN THESE CASES. THEREFORE, IT WOULD ALWAYS BE OPEN TO THE RE VENUE TO TAKE CORRECTIVE MEASURE BY TREATING THIS DIVIDEND INCOME AT THE HANDS OF THE SHAREHOLDERS AND TAX THEM ACCORDINGLY. AS OT HERWISE, IT I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 15 -: WOULD AMOUNT TO ESCAPEMENT OF INCOME AT THE HANDS O F THOSE SHAREHOLDERS.' 11.2 THE SAME VIEW HAS ALSO BEEN EXPRESSED BY THE H ON'BLE DELHI HIGH COURT AGAIN IN CASE OF CIT VS. NAVYUG PROMOTER S P. LTD. (203 TAXMAN 618) AND HON'BLE BOMBAY HIGH COURT IN CASE O F CIT VS. UNIVERSAL MEDICARE (P) LTD., (324 ITR 263). 11.3 THE IT AT, HYDERABAD BENCH IN CASE OF MARC MA NUFACTURERS PVT. LTD. VS. ACIT IN ITA NO. 555/HYD/2008 DT. 31/0 8/2009 WHILE CONSIDERING IDENTICAL ISSUE OF ADVANCEMENT OF LOAN TO ONE COMPANY, WHICH IS NOT A SHAREHOLDER OF THE LENDER COMPANY FO LLOWING THE. DECISION OFM/S. ACE TYRES LIMITED, BACHUPALLY, RANG A REDDY DISTRICL ITAT MUMBAI SPECIAL BENCH IN CASE OF BHAUMIK COLOUR P. LTD. (SUPRA) AND OTHER DECISIONS HELD AS UNDER: '5. IT CAN BE SEEN FROM THE CIRCULAR THAT THE PROVI SIONS OF AMENDED SECTION 2(22)(E) ARE TO BE APPLIED ONLY TO THE PAYM ENTS MADE TO THE SHAREHOLDERS AND NOT TO ANY OTHER PERSON OR CON CERN OTHER THAN THE SHAREHOLDERS. THE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. H. K. MITTAL REPORTED IN 219 ITR 420 HELD T HAT THE CHIEF INGREDIENT OF DIVIDEND AS DEFINED IN SUB CLAUSE (E) OF CLAUSE (22) OF SECTION 2 OF THE I T ACT IS THAT THE RECIPIENT S HOULD A SHAREHOLDER ON THE DAY THE LOAN WAS ADVANCED. IF TH AT FACT IS NOT ESTABLISHED, THERE CANNOT BE A DEEMED DIVIDEND. THE REFORE, THE PROVISIONS OF SEC. 2(22)(E) CANNOT BE APPLIED TO MA RC AS IT IS NOT A SHAREHOLDER IN MTAR TECHNOLOGIES PVT. LTD. (HEREI NAFTER CALLED AS MTAR). IN THIS REGARD, THE ASSESSEE RELIES ON TH E DECISION OF THE ITAT MUMBAI BENCH 'G' IN THE CASE OF SEAMIST PR OPERTIES PVT. LTD. VS. ITO REPORTED IN (2005) 1 SOT PAGE 142 . THE ASSESSEE FURTHER SUBMITS THAT THE PROVISIONS OF SEC . 2(22)( E) MENTION AS UNDER: ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN W HICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WH ETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) (MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF AD VANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFIC IAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE O F DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN P ROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER, OR TO A NY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUS E REFERRED TO AS I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 16 -: THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPAN Y ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOL DER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUM ULATED PROFITS' 11.4 THE ITAT MUMBAI SPECIAL BENCH IN CASE OF BHAU MIK COLOUR P. LTD. (SUPRA) HELD AS UNDER: 24. THE EXPRESSION 'SHAREHOLDER BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES' REFERRED TO IN THE FIRST LIMB OF S. 2(22 )(E) REFERS TO BOTH A REGISTERED SHAREHOLDER AND BENEFICIAL SHAREHOLDER. IF A PERSON IS A REGISTERED SHAREHOLDER BUT NOT THE BENEFICIAL THEN THE PROVISION OF S. 2(2 2)(E) WILL NOT APPLY. SIMILARLY IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A R EGISTERED SHAREHOLDER THEN ALSO THE FIRST LIMB OF PROVISIONS OF S. 2(22)(E) WI LL NOT APPLY. 25. THE NEW CATEGORY OF PAYMENT WHICH WAS CONSIDERED A S DIVIDEND INTRODUCED BY THE FINANCE ACT, 1987 W.E.F. 1ST APRI L, 1988 BY THE SECOND LIMB OF S. 2(22)(E) IS PAYMENT 'TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTI AL INTEREST'. IT IS THIS CATEGORY OF PAYMENT WITH WHICH WE ARE CONCERNED IN THIS REFERENCE. 26. THE FOLLOWING CONDITIONS ARE REQUIRED TO BE SATISF IED FOR APPLICATION OF THE ABOVE CATEGORY OF PAYMENT TO BE REGARDED AS DIVIDEN D. THEY ARE : (A) THERE MUST BE A PAYMENT TO A CONCERN BY A COMPA NY. (B) A PERSON MUST BE A SHAREHOLDER OF THE COMPANY B EING A REGISTERED HOLDER AND BENEFICIAL OWNER OF SHARES (NOT BEING SHARES EN TITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICI PATE 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 S. 2(22)(E) VIZ., A REGISTERED AND A BENEFICIAL HOLDER OF SHARES HOLDIN G 10 PER CENT VOTING POWER. THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF UNI ON OF INDIA VS. WAZIR SINGH AIR 1980 RAJ 252, WHILE DEALING WITH AN EXPRESSION 'NO SUCH APPLICATION' IN THE CONTEXT OF R. 97 OF THE RAJASTHAN HIGH COURT RU LES, 1952 HAS HELD AS FOLLOWS : 'GENERALLY THE WORD SUCH REFERS ONLY TO PREVIOUSL Y INDICATED, CHARACTERIZED OR SPECIFIED. SUCH IS AN ADJECTIVE MEANING, THE ONE PREVIOUSLY INDICATED OR REFERS ONLY TO SOMETHING WHICH HAS BEEN SAID BEFORE.' THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF MOH AN LAL & ANR. VS. GRAIN CHAMBERS LTD. AIR 1959 ALL 279 HAS HELD AS FOLLOWS : 'IN FACT, IT APPEARS TO US THAT THE WORD SUCH IS USED BEFORE A NOUN IN A LATTER PART OF A SENTENCE, THE PROPER CONSTRUCTION IN THE ENGLISH LANGUAGE IS TO HOLD THAT THE SAME NOUN IS BEING USED AFTER THE WORD SU CH WITH ALL ITS CHARACTERISTICS WHICH MIGHT HAVE BEEN INDICATED EAR LIER IN THE SAME SENTENCE.' I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 17 -: (C) THE VERY SAME PERSON REFERRED TO IN (B) ABOVE M UST 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 D URING THE PREVIOUS YEAR, BE BENEFICIALLY ENTITLED TO NOT LESS THAN TWENTY PE R CENT 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 DIVIDE ND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS, CARRYING NOT LESS THAN TWENTY 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. 27. IN THE CASE OF THE ASSESSEE IT IS SEEN THAT CONDIT IONS (B) AND (C) ARE NOT SATISFIED INASMUCH AS NNT HELD SHARES IN UPPL AND B CPL ONLY AS A LEGAL AND REGISTERED OWNER BUT NOT AS A BENEFICIAL OWNER. IN THE CASE OF THE ASSESSEE IT IS SEEN THAT THE THREE TRUSTEES OF NNT HELD SHARES IN UPPL AND BCPL ONLY AS A LEGAL AND REGISTERED OWNER. THEY HELD SHARES FOR AN D ON BEHALF OF 5 BENEFICIARIES OF THE TRUST WHO ARE DIFFERENT INDIVI DUALS. THEY WERE THEREFORE NOT BENEFICIAL OWNERS OF THE SHARES. TRUST OWNERSHIP IS A PECULIAR INSTANCE OF DUPLICATE OWNERSHIP. TRUST PROPERTY IS, IN FACT, OW NED BY TWO PERSONS SIMULTANEOUSLY IN THE SENSE THAT ONE IS UNDER AN OB LIGATION TO USE THE PROPERTY FOR THE BENEFIT OF THE OTHER. THE OWNERSHIP OF THE TRUSTEE CALLED TRUST OWNERSHIP IS NOMINAL RATHER THAN REAL. THE BENEFICIARY INTERE ST IS CALLED THE BENEFICIAL INTEREST. THE TRUSTEE IS TO ADMINISTER THE PROPERTY OF ANOTHER PERSON BUT THE OWNERSHIP RIGHT IN THE TRUSTEE IS TO BE USED ONLY O N BEHALF OF THE REAL OWNER. AS BETWEEN TRUSTEE AND THIRD PARTY OWNERSHIP CONFERRED ON THE TRUSTEE FICTITIOUSLY BY LAW PREVAILS, I.E., THE TRUSTEE IS CLOTHED WITH THE RIGHTS OF THE BENEFICIARY AND IS SO ENABLED TO PERSONATE OR REPRESENT HIM IN DEALINGS WITH THE WORLD AT LARGE. THE MAIN PURPOSE OF TRUSTEESHIP IS TO PROTEC T THE RIGHTS AND INTEREST OF PERSON WHO FOR ANY REASON ARE UNABLE EFFECTIVELY TO PROTECT THEM FOR THEMSELVES. SUCH PROTECTION IS REQUIRED FOR FOUR CL ASSES OF PEOPLE, (A) UNBORN PERSONS; (B) INFANTS, LUNATICS, OR OTHER DISQUALIFI ED PERSONS; (C) A LARGE NUMBER OF PERSONS WHO ARE INTERESTED IN COMMON; AND (D) PE RSONS HAVING CONFLICTING INTEREST IN THE SAME PROPERTY, I.E., AN OWNER AND A N ENCUMBRANCER OR DIFFERENT KINDS OF ENCUMBRANCES. THEREFORE, THE FIRST REQUIRE MENT OF HOLDING OF SHARES BOTH AS A LEGAL REGISTERED OWNER AND BENEFICIAL OWN ER OF SUCH SHARES IS NOT SATISFIED IN THE CASE OF THE ASSESSEE. THEREFORE, P ROVISIONS OF S. 2(22)(E) WOULD NOT BE APPLICABLE AT ALL TO THE CASE OF THE ASSESSE E. 28. THE ANSWER TO THE SECOND QUESTION REFERRED TO THE SPECIAL BENCH IS THAT THE EXPRESSION SHAREHOLDER REFERRED TO IN S. 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 S. 2(22)(E) WILL NOT APPLY. SIMILARLY, IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE PROVISIONS O F S. 2(22)(E) WILL NOT APPLY. 29. IN VIEW OF THE FACT THAT THE ASSESSEE WAS NOT HOLD ING BENEFICIAL INTEREST IN SHARES OF BPCL AND UPPL, THERE IS NO REQUIREMENT OF ANSWERING THE FIRST QUESTION THAT ARISES FOR CONSIDERATION IN THE CASE OF THE ASSESSEE VIZ., AS TO WHETHER DEEMED DIVIDEND UNDER S. 2(22)(E) OF THE IT ACT, 1961 CAN BE ASSESSED IN THE HANDS OF A PERSON OTHER THAN A SHAR EHOLDER OF THE LENDER ? HOWEVER, IN THE CASE OF THE INTERVENER VIZ., ASSTT. CIT VS. WEAVELAND, ITA NO. 5036/DEL/2008 (SUPRA) THIS QUESTION NEEDS TO BE ANS WERED. THE FACTS IN THE I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 18 -: CASE OF THE INTERVENER HAVE ALREADY BEEN NARRATED E ARLIER AND ARE NOT BEING REPEATED HERE. 30. AT THE OUTSET IT HAS TO BE MENTIONED THAT PROVISIO NS OF S. 2(22)(E) WHICH BROUGHT IN A NEW CATEGORY OF PAYMENT WHICH WAS TO B E CONSIDERED AS DIVIDEND AS INTRODUCED BY THE FINANCE ACT, 1987 W.E.F 1ST AP RIL, 1988 VIZ., PAYMENT BY A COMPANY 'TO ANY CONCERN IN WHICH SUCH SHAREHOLDER I S 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 T HE HANDS OF THE 'CONCERN' OR THE 'SHAREHOLDER'. WE HAVE ALREADY SEEN THE DIVERGE NT VIEWS ON THIS ISSUE WHICH HAVE BEEN REFERRED TO IN THE EARLIER PART OF THIS ORDER. 31. THE ABOVE PROVISIONS WERE SUBJECT-MATTER OF CONSID ERATION BEFORE THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. HOTEL HILLTOP (SUPRA). THE FACTS OF THE CASE BEFORE THE HONBLE COURT WERE AS FOLLOWS. THE ASSESSEE WAS ONE M/S HOTEL HILLTOP A PARTNERSHIP FIRM. THIS FIRM RECEIVED AN ADVANCE OF RS. 10 LAKHS FROM A COMPANY M/S HILLTOP PALACE HOTELS ( P) LTD. THE SHAREHOLDING PATTERN OF M/S HILLTOP PALACE HOTELS (P) LTD., WAS AS FOLLOWS : 1. 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 HILLTOP WAS AS F OLLOWS : 1. SHRI ROOP KUMAR KHURANA 45% 2. SHRI DESHBANDHU KHURANA 55% THE AO ASSESSED THE SUM OF RS. 10 LAKHS AS DEEMED D IVIDEND UNDER S. 2(22)(E) OF THE ACT IN THE HANDS OF THE FIRM BECAUS E THE TWO PARTNERS OF M/S HOTEL HILLTOP WERE HOLDING SHARES BY WHICH THEY HAD 10 PER CENT VOTING POWER IN M/S HILLTOP PALACE HOTEL (P) LTD. THEY WERE ALSO ENTITLED TO 20 PER CENT OF THE INCOME OF THE FIRM M/S HOTEL HILLTOP. THEREFORE THE LOAN BY M/S HILLTOP PALACE HOTELS (P) LTD. TO THE FIRM M/S HOTEL HILLTOP WAS T REATED AS DEEMED DIVIDEND IN THE HANDS OF M/S HOTEL HILLTOP, THE FIRM UNDER THE SECOND LIMB OF S. 2(22)(E) OF THE ACT. THE CIT(A) HELD THAT SINCE THE FIRM WAS NO T THE SHAREHOLDER OF THE I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 19 -: COMPANY THE ASSESSMENT AS DEEMED DIVIDEND IN THE HA NDS OF THE FIRM WAS NOT CORRECT. THE ORDER OF THE CIT(A) WAS CONFIRMED BY T HE TRIBUNAL. ON REVENUES APPEAL BEFORE THE HONBLE HIGH COURT, THE FOLLOWING QUESTION OF LAW WAS FRAMED FOR CONSIDERATION : 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LEARNED TRIBUNAL WAS JUSTIFIED IN UPHOLDING THE ORD ER OF LEARNED CIT(A) DELETING THE ADDITION OF RS. 10 LAKHS AS DEEMED DIVIDEND UND ER S. 2(22)(E) OF THE IT ACT ?' THE HONBLE COURT HELD AS FOLLOWS : 'THE IMPORTANT ASPECT, BEING THE REQUIREMENT OF S. 2(22)(E) IS, THAT THE PAYMENT MAY BE MADE TO ANY CONCERN, IN WHICH SUCH S HAREHOLDER IS A MEMBER, OR THE PARTNER, AND IN WHICH HE HAS SUBSTAN TIAL INTEREST, OR ANY PAYMENT BY ANY SUCH COMPANY, ON BEHALF OR FOR THE I NDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER ........ THUS, THE SUBSTANCE OF T HE REQUIREMENT IS THAT THE PAYMENT SHOULD BE MADE ON BEHALF OF OR FOR THE INDI VIDUAL BENEFIT OF ANY SUCH SHAREHOLDER. OBVIOUSLY, THE PROVISION IS INTENDED T O ATTRACT THE LIABILITY OF TAX ON THE PERSON, ON WHOSE BEHALF, OR FOR WHOSE INDIVI DUAL BENEFIT, THE AMOUNT IS PAID BY THE COMPANY, WHETHER TO THE SHAREHOLDER, OR TO THE CONCERNED FIRM. IN WHICH EVENT, IT WOULD FALL WITHIN THE EXPRESSION D EEMED DIVIDEND. OBVIOUSLY, INCOME FROM DIVIDEND IS TAXABLE AS INCOME FROM THE OTHER SOURCES UNDER S. 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 SHO WN TO BE ONE OF THE PERSONS; BEING SHAREHOLDER. OF COURSE, THE TWO INDI VIDUALS BEING R AND D, ARE THE COMMON PERSONS, HOLDING MORE THAN REQUISITE AMO UNT OF SHAREHOLDING AND ARE HAVING REQUISITE INTEREST, IN THE FIRMS, BUT TH EN, 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 SIGNI FICANT REQUIREMENT OF S. 2(22)(E) IS NOT SHOWN TO EXIST. THE LIABILITY OF TA X, AS DEEMED DIVIDEND, COULD BE ATTRACTED IN THE HANDS OF THE INDIVIDUALS, BEING THE SHAREHOLDERS, AND NOT IN THE HANDS OF THE FIRM.' 32. THE AFORESAID DECISION OF THE HONBLE RAJASTHAN HI GH COURT WHICH IS THE ONLY DECISION OF HIGH COURT, SHOULD BE SUFFICIENT T O ANSWER QUESTION NO. 2 WHICH HAS BEEN REFERRED TO THE SPECIAL BENCH BY HOL DING THAT DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO I S A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTH ER THAN A SHAREHOLDER. THE ARGUMENT OF THE LEARNED DEPARTMENTAL REPRESENTA TIVE THAT THE HONBLE RAJASTHAN HIGH COURT DID NOT DEAL WITH THE SECOND L IMB OF S. 2(22)(E) OF THE ACT IS NOT CORRECT. 33. WE MAY ALSO TOUCH UPON CERTAIN OTHER ASPECTS OF TH E ISSUE IN THE LIGHT OF THE SUBMISSIONS MADE BEFORE US. THE TRIBUNAL IN THE CASE OF NIKKO TECHNOLOGIES (I) (P) LTD. (SUPRA), WHILE HOLDING TH AT THE PAYMENT MADE BY A COMPANY EVEN TO A NON-SHAREHOLDER CAN BE BROUGHT TO TAX IN THE HANDS OF THE NON-SHAREHOLDER HAS MADE THE FOLLOWING OBSERVATIONS : '12 ........... SEC. 2(22)(E) ONLY SPECIFIES THE CI RCUMSTANCES UNDER WHICH A PAYMENT BY WAY OF LOAN/ADVANCE IS TO BE TREATED AS DEEMED DIVIDEND. ONCE IT IS DETERMINED THAT ANY PAYMENT BY WAY OF LOAN/ADVAN CE FALLS WITHIN THE AMBIT I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 20 -: OF S. 2(22)(E), THEN, IT HAS TO BE TREATED AS DIVID END EVEN THOUGH SUCH PAYMENT IN THE ORDINARY CIRCUMSTANCES MAY NOT BE CO NSIDERED AS DIVIDEND. AT THIS POINT OF TIME, ROLE OF S. 2(22)(E) ENDS. IT NO WHERE PROVIDES AS TO WHO IS TO BE TAXED IN RESPECT OF SUCH INCOME. IT IS TO BE BOR NE IN MIND THAT THE TAX CAN ONLY BE ASSESSED IN THE HANDS OF RIGHT PERSON AS HE LD BY THE APEX COURT IN THE CASE OF ITO VS. CH. ATCHAIAH (1996) 130 CTR (SC) 40 4 : (1996) 218 ITR 239 (SC), AT PP. 243-244. 13. IN ORDER TO FIND OUT THE RIGHT PERSON, ONE HAS TO EXAMINE THE CHARGING PROVISIONS OF THE ACT. SECS. 4 AND 5 OF THE ACT ARE THE CHARGING PROVISIONS.......' THEREAFTER, THE TRIBUNAL HAS REFERRED TO THE PROVIS IONS OF S. 5(1) OF THE ACT AND HAS CONCLUDED THAT INCOME ACCRUES TO THE PERSON WHO IS THE RECIPIENT OF THE PAYMENT FROM THE COMPANY. THE TRIBUNAL HAS THEREAFT ER REFERRED TO CIRCULAR NO. 495, DT. 22ND SEPT., 1987 OF THE CBDT WHEREIN I T HAS BEEN OPINED THAT DEEMED DIVIDEND WOULD BE TAXED IN THE HANDS OF A CO NCERN (NON-SHAREHOLDER) ALSO IF THE CONDITIONS MENTIONED IN THE SECTION ARE SATISFIED. 34. WE ARE OF THE VIEW THAT THE PROVISIONS OF S. 2(22) (E) DO 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 AMBIG UOUS. IT IS THEREFORE NECESSARY TO EXAMINE THE INTENTION BEHIND ENACTING THE PROVISIONS OF S. 2(22)(E) OF THE ACT. 35. THE INTENTION BEHIND ENACTING PROVISIONS OF S. 2(2 2)(E) ARE THAT CLOSELY HELD COMPANIES (I.E., COMPANIES IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED), WHICH ARE CONTROLLED BY A GROUP OF MEM BERS, EVEN THOUGH THE COMPANY HAS ACCUMULATED PROFITS WOULD NOT DISTRIBUT E 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 ADVA NCES 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 S. 2(22)(E) IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDER. THE DEEMING P ROVISION AS IT APPLIES TO THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CON CERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST IS BASED ON TH E PRESUMPTION THAT THE LOAN OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO T HE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. THE INTENTION O F 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 S. 2(22) (E) OF THE ACT BY THE FINANCE ACT, 1987 W.E.F 1ST APRIL, 1988 IS TO ENSUR E 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 CA N CONTROL THE AFFAIRS OF THE CONCERN CAN DRAW THE SAME FROM THE CONCERN INST EAD OF THE COMPANY DIRECTLY MAKING PAYMENT TO THE SHAREHOLDER AS DIVID END. THE SOURCE OF POWER TO CONTROL THE AFFAIRS OF THE COMPANY AND THE CONCE RN IS THE BASIS ON WHICH THESE PROVISIONS HAVE BEEN MADE. IT IS THEREFORE PR OPER 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., CON CERN. A LOAN OR ADVANCE I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 21 -: RECEIVED BY A CONCERN IS NOT IN THE NATURE OF INCOM E. IN OTHER WORDS, THERE IS A DEEMED ACCRUAL OF INCOME EVEN UNDER S. 5(1)(B) IN T HE HANDS OF THE SHAREHOLDER ONLY AND NOT IN THE HANDS OF THE PAYEE VIZ., NON-SHAREHOLDER (CONCERN). SEC. 5(1)(A) CONTEMPLATES THAT THE RECEI PT OR DEEMED RECEIPT SHOULD BE IN THE NATURE OF INCOME. THEREFORE THE DEEMING F ICTION CAN BE APPLIED ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT THE NON-SHA REHOLDER VIZ., THE CONCERN. 37. THE DEFINITION OF DIVIDEND UNDER S. 2(22)(E) OF TH E ACT 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 MEANI NG OF THE TERM DIVIDEND WOULD BE A SHARE IN PROFITS TO AN INVESTOR IN THE S HARE CAPITAL OF A LIMITED COMPANY. TO THE EXTENT THE MEANING OF THE WORD 'DIV IDEND' IS EXTENDED TO LOANS AND ADVANCES TO A SHAREHOLDER OR TO A CONCERN IN WHICH A SHAREHOLDER IS SUBSTANTIALLY INTERESTED DEEMING THEM AS DIVIDEND I N 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 EXTENDE D TO A LOAN OR ADVANCE TO A NON-SHAREHOLDER, THE ORDINARY AND NATURAL MEANING O F THE WORD 'DIVIDEND' IS TAKEN AWAY. IN THE LIGHT OF THE INTENTION BEHIND TH E PROVISIONS OF S. 2(22)(E) AND IN THE ABSENCE OF INDICATION IN S. 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. 38. THE BASIC CHARACTERISTIC OF DIVIDEND AS HELD BY TH E APEX COURT IN THE CASE OF KANTILAL MANILAL VS. CIT (1961) 41 ITR 275 (SC) IS A SHARE OF PROFITS OF THE COMPANY GIVEN TO ITS SHAREHOLDERS. FURTHER, S. 206 OF THE COMPANIES ACT, 1956 PROHIBITS PAYMENT OF DIVIDEND TO ANY PERSON OTHER T HAN THE REGISTERED SHAREHOLDER. IF ONE WERE TO BREAK UP THE NATURAL ME ANING, THE FOLLOWING TWO COMPONENTS EMERGE (A) DIVIDEND IS A SHARE OF PROFIT S OF THE COMPANY; (B) PAID TO ITS SHAREHOLDERS. SEC. 2(22) OF THE ACT ARTIFICI ALLY EXTENDS THE SCOPE OF DIVIDEND FROM BEING MORE THAN ONLY A DISTRIBUTION O F PROFITS TO COVER CERTAIN OTHER TYPES OF DISBURSEMENTS SUCH AS LOANS PAID ETC . (THE FIRST INGREDIENT MENTIONED ABOVE). IT DOES NOT HOWEVER ALTER THE SEC OND COMPONENT OF ITS NATURAL MEANING VIZ. PAID TO ITS SHAREHOLDER. IN OT HER WORDS, ALL THAT S. 2(22) SEEKS TO DO IS TO EXPAND THE VARIOUS TYPES OF PAYME NTS THAT MAY BE REGARDED AS DIVIDEND. THE APEX COURT WHILE CONSIDERING WHAT CAN COME WITHIN THE ARTIFICIAL DEFINITION OF DIVIDEND UNDER S. 2(22) IN THE CASE OF CIT VS. NALIN BEHARI LALL SINGHA (1969) 74 ITR 849 (SC), DESCRIBED THE S COPE OF THE DEFINITION OF DIVIDEND THUS 'THE DEFINITION IS, IT IS TRUE, AN INCLUSIVE DEFINI TION AND A RECEIPT BY A SHAREHOLDER WHICH DOES NOT FALL WITHIN THE DEFINITI ON MAY POSSIBLY BE REGARDED AS DIVIDEND WITHIN THE MEANING OF THE ACT UNLESS TH E CONTEXT NEGATIVES THAT VIEW.' THE CONTENTION OF THE DEPARTMENTAL REPRESENTATIVE T HAT PROVISIONS OF S. 8(A) OF THE ACT CREATE A FICTION BY WHICH EVEN PAYMENTS TO NON-SHAREHOLDERS CAN BE CONSTRUED AS DIVIDEND CANNOT BE ACCEPTED. THOSE PRO VISIONS MERELY FIX THE YEAR IN WHICH DIVIDEND HAS TO BE TAXED. IT IS THERE FORE CLEAR THAT THE SHAREHOLDER ALONE CAN, IF AT ALL, BE SUBJECTED TO T AX FOR HAVING EARNED DIVIDEND. I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 22 -: 39. IN THE DECISION OF THE TRIBUNAL IN THE CASE OF NIK KO TECHNOLOGIES (I) (P) LTD. (SUPRA), RELIANCE HAS BEEN PLACED ON CIRCULAR NO. 495, DT. 22ND SEPT., 1987 WHICH STATES AS FOLLOWS : 'FURTHER DEEMED DIVIDEND WOULD BE TAXABLE IN THE HA NDS OF THE CONCERN, WHERE ALL THE FOLLOWING CONDITIONS ARE SATISFIED......... ........' WE ARE OF THE VIEW THAT CIRCULARS OF CBDT TO THE EX TENT 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 RELIEF TO A SHAREHOLDER AS FOLLOWS : 'DIVIDEND DOES NOT INCLUDE : (I) TO (II).......... (III) ANY DIVIDEND PAID BY A COMPANY WHICH IS SET O FF 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 E XTENT TO WHICH IT IS SO SET OFF.' 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 ON LY PAID TO THE SHAREHOLDER, WHO HAS SUBSTANTIAL INTEREST IN THE CO NCERN. THE ABOVE PROVISIONS ALSO THEREFORE CONTEMPLATE DEEMED DIVIDEND BEING TA XED 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 UND ER S. 2(22)(E) OF THE IT ACT, 1961 CAN BE ASSESSED ONLY IN THE HANDS OF A SH AREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF ANY OTHER PERSON. 41. IN THE LIGHT OF THE ABOVE DISCUSSION, THE QUESTION S REFERRED TO THE SPECIAL BENCH ARE ANSWERED AS FOLLOWS : ON THE FIRST QUESTION : DEEMED DIVIDEND CAN BE ASSE SSED ONLY IN THE HANDS OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY A ND NOT IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER. ON THE SECOND QUESTION : THE EXPRESSION SHAREHOLDE R REFERRED TO IN S. 2(22)(E) REFERS TO BOTH A REGISTERED SHAREHOLDER AN D BENEFICIAL SHAREHOLDER. IF A PERSON IS A REGISTERED SHAREHOLDER BUT NOT THE BE NEFICIAL SHAREHOLDER THEN THE PROVISIONS OF S. 2(22)(E) WILL NOT APPLY. SIMILARLY , IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN A LSO THE PROVISIONS OF S. 2(22)(E) WILL NOT APPLY. 11.5 THE INTENTION OF THE LEGISLATURE IS CLARIFIED IN CIRCULAR ISSUED BY THE CBDT AS AT THE TIME OF AMENDMENT OF CLAUSE (E) OF SUB SECTION I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 23 -: (22) OF SEC. 2 IS FURTHER FORTIFIED BY THE FACT THA T FOR DEDUCTION OF TAX AT SOURCE. SEC. 194 PROVIDE THAT SUCH DEDUCTION OF TAX HAS TO BE MADE IN THE CASE OF THE PAYMENTS OF THE NATURE MENTIONED IN CLAUSES (A), (B), (C), (D) AND (E) OF SUB SECTION (22) OF SECTION 2 O NLY IN A CASE WHERE SUCH PAYMENTS WERE MADE TO A SHAREHOLDER. SECTION 1 99 ALSO INDICATES THAT ADJUSTMENT OF TDS WOULD BE PROVIDED IN THE ASSESSMENT OF SHAREHOLDER ONLY. THE VERY FACT THAT THE PROVISI ON FOR DEDUCTION OF TAX AT SOURCE AND ADJUSTMENT OF TAX IS ONLY IN RESP ECT OF THE PAYMENTS TO THE' SHAREHOLDER WOULD CLEARLY INDICATE THAT EV EN AFTER THE AMENDMENT, THE EFFECT OF CLAUSE (E) OF SUB SECTION (22) OF SEC. 2 WOULD APPLY ONLY WHEN THE PAYMENT IS MADE TO SHAREHOLDER. WHEREVER, THE TAX IS TO BE DEDUCTED AT SOURCE FROM A DIVIDEND OR DEEMED DIVIDEND AND THE CONSEQUENTIAL EFFECT OF GIVING EFFECT TO SU CH DEDUCTION OF TAX AT SOURCE, ETC., REFERENCE WAS MADE ONLY TO THE PAYMEN TS TO THE SHAREHOLDER. THIS WOULD INDICATE CLEARLY THAT CLAUS E (E) WOULD APPLY ONLY IN CASE OF PAYMENTS TO THE SHAREHOLDER AND NOT TO OTHERS. 11.6 IN VIEW OF THE FOREGOING DISCUSSION AND FOLLOW ING THE SPECIAL BENCH DECISION OF MUMBAI TRIBUNAL IN THE CASE OF AC IT VS. BHAUMIC COLOUR PVT. LTD. AS WELL AS THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. ANKITECH P. LTD., WE HOLD TH AT THE DIVIDEND INCOME IS TAXABLE IN THE HANDS OF SHAREHOLDERS AND NOT IN THE HANDS OF THE CONCERN. ACCORDINGLY, WE DISMISS THE ASSESSEES GROUND ON THIS ISSUE. 11.7 AS REGARDS THE CONTENTION OF THE AR OF THE ASS ESSEE THAT THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE AO IN N OT CONSIDERING THE CBDT CIRCULAR NO. 495 OF 1987, DATED 22 ND SEPTEMBER 1987 WHICH WAS BINDING ON THE AO, AS RAISED IN ADDITIONAL GROUND N O. 4, WE ARE OF THE VIEW THAT THE ASSESSEE IS A SHARE HOLDER IN THE PAY ER COMPANY I.E. M/S CASPIAN CAPITAL AND FINANCE PVT. LTD. AND ALSO A SH AREHOLDER IN THE COMPANIES M/S METRO ARCHITECTURES & CONTRACTORS PVT . LTD., AND M/S ORBIT TRAVELS & TOURS PVT. LTD., TO WHOM THE PAYER COMPANY ADVANCED I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 24 -: AN AMOUNT OF RS. 36.10 LAKHS AND RS. 15.00 LAKHS RE SPECTIVELY. THE CBDT ISSUED THE CIRCULAR IN 1987 AND SUBSEQUENTLY, THERE ARE NUMBER OF DECISIONS RENDERED BY VARIOUS COURTS INTERPRETIN G THE STATUTE AND HELD THAT DEEMED DIVIDEND SHOULD BE TAXED IN THE H ANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF RECIPIENT CONCE RN. THE CIRCULAR NO. 495 IS NOT BINDING ON THE COURTS AND LOWER COUR TS HAVE TO FOLLOW THE JUDGEMENTS OF HIGHER JUDICIARY AS MATTER OF JUD ICIAL DISCIPLINE. HOWEVER, LD. AR ARGUED THAT THE SAID CIRCULAR IS A BENEFICIAL CIRCULAR, BUT, AS OBSERVED FROM THE CIRCULAR, IT IS NOT A BEN EFICIAL OR BENEVOLENT CIRCULAR, BUT, IT IS ONLY A CLARIFICATORY IN NATURE . SINCE THE ISSUE HAS BEEN SETTLED BY HONBLE SPECIAL BENCH AND APPROVED BY HONBLE DELHI HIGH COURT, THE JUDGEMENTS OF COURTS ARE BINDING AN D AS HELD BY THE HONBLE DELHI HIGH COURT, ONCE WE FIND THAT THE LOA N OR ADVANCE IS NOT TAXABLE IN THE HANDS OF SUCH CONCERN AND SHOULD BE TAXED IN THE HANDS OF SHAREHOLDER AND THAT IS A CORRECT LEGAL POSITION ACCORDING TO US, SUCH A CIRCULAR WOULD BE OF NO USE. FURTHER, CIRCU LARS ARE NOT BINDING ON THE COURTS. ACCORDINGLY, WE DISMISS THIS GROUN D OF ASSESSEE. 11.8 AS REGARDS THE APPLICATION OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF GOPAL DAS AND SONS (HUF), 77 T AXMANN.COM 71 (SC), LD. DR ARGUED THAT THE SAID CASE IS RELATED TO HUF. HUF CANNOT BE A REGISTERED SHAREHOLDER, FUNDS ARE FLOWN FROM H UF AND HUF HAD BENEFICIAL INTEREST AND KARTA IS REPRESENTING THE H UF. THE HONBLE SUPREME COURT IN THE SAID CASE HELD THAT EVEN HUF I S NOT A REGISTERED SHAREHOLDER, LOAN ADVANCED TO HUF IS TAXABLE BECAUS E OF THE REASON EXPLAINED ABOVE. THE DECISION OF THE HONBLE APEX C OURT IS SPECIFIC ON THE FACTS OF THIS CASE AND APPLICABLE TO HUF, BUT, HAS NOT LAID DOWN ANY LAW. THEREFORE, RELIANCE PLACED BY THE LD. AR O N THE SAID CASE IS DISTINGUISHABLE ON FACTS AND NOT APPLICABLE TO THE FACTS OF THE CASE. HENCE, ON THIS ISSUE, CONTENTIONS OF THE LD. A.R I S NOT TENABLE AND REJECTED. I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 25 -: 11.9 AS REGARDS THE CONTENTION OF THE LD. AR IN ADD ITIONAL GROUND NO. 5 THAT THE CIT(A) ERRED IN NOT RESTRICTING THE ADDIT ION U/S 2(22(E) PROPORTIONATE TO THE EXTENT OF ASSESSEES SHAREHOLD ING IN RECIPIENT COMPANY, THE CIT(A) DIRECTED THE AO AS UNDER: WHERE THE AMOUNT HAS BEEN TAXED IN THE HANDS OF APPELLANT AND SPOUSE OF THE APPELLANT I.E. MR. REDDY - IN THE HANDS OF APPELLANT AND SPOUSE OF THE APPELLANT I.E. MR. REDD Y AS PER THE SHAREHOLDING RATIO OF APPELLANT AND MR. REDDY IN TH E PAYER COMPANY I.E. CASPIAN; IN OTHER SCENARIO I.E. WHERE AMOUNT HAS BEEN TAXE D EITHER IN THE HANDS OF THE APPELLANT OR SPOUSE OF THE APPELLANT, NO SUCH APPORTIONMENT SHOULD BE MADE I.E. THE ENTIRE AMOUNT TO BE TAXED IN HANDS OF THE APPELLANT OR MR. REDDY, AS THE CASE MAY BE. 11.10 LD. DR ARGUED THAT THE LOANS ADVANCED TO THE RECIPIENT COMPANIES ARE REQUIRED TO BE TAXED IN PROPORTION T O THE SHARE HOLDING OF THE ASSESSEES IN THE RECIPIENT COMPANY. THE INT ENTION OF TAXATION OF DEEMED DIVIDEND IS CLEARLY EXPLAINED BY THE SPECIAL BENCH OF ITAT MUMBAI IN THE CASE OF BHAUMIC COLOURS (SUPRA), THE OBSERVATIONS OF WHICH WERE EXTRACTED IN ABOVE PARAGRAPHS. THE ENTIR E ADVANCES OR LOANS GIVEN TO THE CONCERNS OF THE SHARE HOLDERS HA VING SUBSTANTIAL INTEREST REQUIRED TO BE TO THE EXTENT OF ACCUMULATE D PROFITS. THEREFORE, THERE IS NO FAILURE OF COMPUTATION MECHANISM IN TAX ING THE DEEMED DIVIDEND AS THE ENTIRE ADVANCES ARE TO BE TAXED. TH E HONBLE SUPREME COURT IN THE CASE B.C. SRINIVASA SHETTY, [1981] 5 T AXMAN 1 (SC) ON THE ISSUE OF FAILURE OF COMPUTATION MECHANISM, OBSE RVED ON TAXING OF GOODWILL UNDER CAPITAL ASSETS FOR WHICH NO COST OF ACQUISITION WAS AVAILABLE. FOR COMPUTING CAPITAL GAINS AS PER SECTI ON 45, THE COST OF ACQUISITION ALONG WITH INDEXATION REQUIRED TO BE RE DUCED AND IN THE ABSENCE OF COST OF THE ASSET MODE OF COMPUTATION WA S NOT EXPLAINED AND HENCE THE COMPUTATION MECHANISM FAILS. THEREFOR E, THE CASE LAW RELIED UP ON BY THE ASSESSEE IS NOT APPLICABLE TO T HE CASE OF THE ASSESSEE. THE DIVIDEND IS ALWAYS DISTRIBUTED TO THE SHAREHOLDERS OF THE COMPANY AND THE ENTIRE ADVANCES OR LOANS GIVEN TO S UCH CONCERNS OF I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 26 -: SHAREHOLDERS WITH SUBSTANTIAL INTEREST SHOULD BE BR OUGHT TO TAX TO PREVENT UNAUTHORIZED DISTRIBUTION OF DIVIDEND TO TH E CONTROLLING SHAREHOLDERS IN THE GUISE OF LOANS AND ADVANCES. . IN THE ASSSESSEES CASE, BOTH THE ASSESSEE AND HER HUSBAND ARE HAVING MORE THAN 10% SHARE HOLDING IN M/S CASPIAN CAPITAL AND FINANCE P VT. LTD., AND ALSO SHARE HOLDERS IN THE COMPANIES BORROWING COMPANIES HAVING MORE THAN SHARE HOLDING OF 20%. THERE IS NO OTHER SHAREH OLDER WHO IS HAVING SUBSTANTIAL INTEREST IN BOTH THE PAYER COMPA NY AND THE RECIPIENT COMPANIES HAVE BEEN BROUGHT ON RECORD BEFORE US BY THE LD. AR. THEREFORE, WE HOLD THAT THE ADVANCES GIVEN TO THE R ECIPIENT COMPANIES ARE REQUIRED TO BE TAXED IN THE BOTH THE HANDS OF T HE ASSESSEE AND HER HUSBAND. WE ARE UNABLE TO ACCEPT THE CONTENTION OF AR TO FOLLOW DECISION OF PUNEET BHAGAT VS. ITO, [2016] 157 ITD 353, WHEREIN HONOURABLE DELHI TRIBUNAL HELD THAT DEEMED DIVIDEND WOULD BE ASSESSABLE IN THE HANDS OF THE SHAREHOLDERS TO THE PROPORTIONATE SHARE HOLDING OF THE SHAREHOLDERS IN THE RECIPIENT ENTITY . THE DIVIDEND/DEEMED DIVIDEND ALWAYS PAYABLE TO THE SHAR EHOLDERS OF THE PAYER COMPANY. NON SHARE HOLDERS/DEEMED SHARE HOLDE RS HAVE NO RIGHT IN THE DIVIDEND. HENCE, THE QUESTION OF TAXI NG THE DEEMED DIVIDEND AS PER THE PROPORTIONATE SHAREHOLDING IN B ORROWING COMPANY DOES NOT ARISE. THIS ISSUE HAS BEEN CONSIDERED BY T HE ITAT MUMBAI BENCH IN THE CASE OF ITO VS. SAHIR SAMI KHATIB, 57 TAXMANN.COM 13 (MUM. TRIB.) WHEREIN THE TRIBUNAL OBSERVED AS UNDER : IN THE CASE IN HAND THE ADVANCE/LOAN HAS BEEN GIVEN BY MLPL TO ORYX WHICH IS NOT A SHAREHOLDER OF THE LENDING COMPANY BUT THE ASSESSEE IS HOLDING 15 PER CENT OF THE VOTING POWER IN THE LENDING COMPANY AND 45 PER CENT OF THE SHARES IN THE BORROWING COMPANY. THEREFORE, THE PAYMENT IN QUESTION BEING L OAN HAS TO BE EXAMINED IN THE CONTEXT OF SECOND SITUATION, WHEREIN, THE PAYMENT I S GIVEN TO ANY CONCERN IN WHICH THE SHAREHOLDER IS A MEMBER OR A PARTNER AND HAS A SUBSTANTIAL INTEREST. THERE IS NO QUARREL ON THE POINT THAT THE ASSESSEE IS HAVING MO RE THAN 10 PER CENT OF THE VOTING RIGHTS IN THE L ENDING COMPANY. THEREFORE, TO BRING THE PAYMENT IN QUESTION UNDER THE EXPRESSION OF 'DIVIDEND' AS PER CLAUSE (E) OF SECTI ON 2(22), THE CONDITION THAT THE ASSESSEE IS HAVING A SUBSTANTIAL INTEREST IN THE BO RROWING COMPANY HAS TO BE SATISFIED. THE TERM 'CONCERN' HAS BEEN DEFINED IN E XPLANATION 3 TO SECTION 2(22)(E) WHICH INCLUDES HUF OR FIRM OR AN ASSOCIATION OF PER SON OR A BODY OF INDIVIDUAL OR A COMPANY. THEREFORE, ORYX FALLS UNDER THE AMBIT OF T ERM 'CONCERN' AS STIPULATED I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 27 -: UNDER CLAUSE (E) OF SECTION 2(22). THE SUBSTANTIAL INTEREST IN A COMPANY HAS NOT BEEN DEFINED UNDER SECTION 2(22)(E); HOWEVER, THIS TERM HAS BEEN DEFINED IN SECTION 2(32) AND IN THE EXPLANATION TO SECTION 40A(2) WHEREBY A PERSON SHALL BE DEEMED TO HAVE SUBSTANTIAL INTEREST IN A BUSINESS OR A PROFESSION IF THE BUSINESS AND PROFESSION IS CARRIED ON BY A COMPANY, AND SUCH PERSON IS, AT ANY TIME DURING THE PREVIOUS YEAR, IS THE BENEFICIAL OWNER OF SHARES CARRYING NOT LESS THAN 20 PER CENT OF THE VOTING POWERS. IN THE CASE IN HAND, THE ASSESSEE IS HAVING 45 PER CENT OF SHAREHOLDING OF THE BORROWING COMPANY. THEREFORE, BY APPLYING THE PARAM ETERS AS PER SECTION 2(32) AND EXPLANATION TO SECTION 40A(2) AS WELL AS ANY OTHER PARAMETERS I N GENERAL, THE ASSESSEE IS HAVING SUBSTANTIAL INTEREST IN THE BORR OWING COMPANY, I.E., ORYX. [PARA 7-8] SINCE THE ASSESSEE IS A SHAREHOLDER OF THE LENDING COMPANY AND ALSO HAVING A SUB STANTIAL INTEREST IN THE BORROWING COMPANY, THE CON DITIONS AS PRESCRIBED UNDER SECTION 2(22)(E) ARE SATISFIED TO INCLUDE THE PAYME NT IN QUESTION WITHIN THE AMBIT OF 'DIVIDEND' TO BE TAXED IN THE HANDS OF THE ASSESSEE . THE CONTENTION OF ASSESSEE THAT ONLY A PROPORTIONATE AMOUNT OF LOAN RECEIVED BY THE BORROW ING COMPANY CAN BE ASSESSED AS DIVIDEND IN THE HANDS OF THE ASSESSEE T O THE EXTENT OF HIS SHAREHOLDING IN THE BORROWING COMPANY CANNOT BE AGREED WITH DUE TO THE SIMPLE REASON THAT AS PER PROVISIONS OF SECTION 2(22)(E) THE TWO CONDITIONS A RE REQUIRED TO BE FULFILLED, VIZ., THE PERSON HAVING NOT LESS THAN 10 PER CENT OF VOTING P OWER IN THE LENDING COMPANY AND A SUBSTANTIAL INTEREST IN THE BORROWING CONCERN. BO TH THESE CONDITIONS ARE SATISFIED. THEREFORE, IN THE ABSENCE OF ANY SUCH PROVISION OF PROPORTIONATE ADDITION NOTHING CAN BE READ IN BETWEEN THE UNAMBIGUOUS LANGUAGE OF THE PROVISION OF SECTION 2(22)(E). FURTHER, IT IS NOT THE CASE OF MORE THAN ONE SHAREHOLDER COMPLYING THE CONDITIONS OF HAVING NOT LESS T HAN 10 PER CENT VOTING POWER IN THE LENDING COMPANY AND ALSO HAVING SUBSTANTIAL INTEREST IN THE BORROWI NG COMPANY. FROM PERUSAL OF SHAREHOLDING PATTERN, IT WAS FOUND THAT ONLY THE AS SESSEE IS HOLDING 15 PER CENT OF THE VOTING POWER IN THE LENDING COMPANY AND 45 PER CENT OF VOTING POWER IN THE BORROWING COMPANY AND NO OTHER PERSON/SHARE HOLDER IS COMMON OTHER THAN THE ASSESSEE. THEREFORE, THERE IS NO QUESTION OF ANY PR OPORTIONATE ADDITION WHEN THE ASSESSEE IS THE ONLY SHAREHOLDER WHO FULFILS THE CO NDITION PR ESCRIBED UNDER SECTION 2(22)(E). [PARA 9] FOLLOWING THE RATIO LAID DOWN IN THE SAID CASE, WE ARE UNABLE ACCEPT THE CONTENTION OF THE AR THAT THE DEEMED DIVIDEND S HOULD BE ASSESSED IN THE HANDS OF THE ASSESSEE PROPORTIONATELY TO THE EXTENT OF ASSESSEES SHAREHOLDING IN THE RECIPIENT COMPANY. T HEREFORE, WE DISMISS THE GROUND RAISED BY THE ASSESSEE ON THIS I SSUE. 12. AS THE FACTS AND GROUNDS IN APPEAL NOS. 1496, 1 497, 1498, 1499 & 1500/HYD/2014 ARE MATERIALLY IDENTICAL TO THAT OF ITA NO. 1495/HYD/2014 FOR AY 2007-08 IN THE CASE OF SMT. G. INDIRA KRISHNA I.T.A. NOS. 1495 TO 1500 /HYD/2014 SMT. G. INDIRA KRISHNA REDDY AND SHRI G.V. KRISHNA REDDY :- 28 -: REDDY, FOLLOWING THE CONCLUSIONS DRAWN THEREIN, WE DISMISS THE GROUNDS RAISED IN THE SAID APPEALS. 13. IN THE RESULT, ALL THE APPEALS UNDER CONSIDERAT ION ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 24 TH MAY, 2017. SD/- SD/- (D. MANMOHAN) (D.S. SUNDER SINGH) VICE PRESIDENT ACCOUNTANT MEMBER HYDERABAD, DATED:24 TH MAY , 2017. KV 1 SMT. INDIRA KRISHNA REDDY, 6-3-250, ROAD NO. 1, B ANJARA HILLS, HYDERABAD 500 034. 2 SHRI G. V. KRISHNA REDDY, 6-3-250, ROAD NO. 1, BA NJARA HILLS, HYDERABAD 500 034. 2 DCIT, CIRCLE 2(2), HYDERABAD. 3 CIT (A)-III, HYDERABAD. 4 CIT II, HYDERABAD. 5 THE DR, ITAT HYDERABAD 6 GUARD FILE