Microfinish Valves Pvt Ltd, Hubli V. The Assistant Commissioner of Income Tax, Circle-2(1), Hubli

ITA 1706/BANG/2017

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 1850 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 2 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-11-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 13-11-2018
• Assessment Year: 2012-2013
• Appeal Filed On: 21-08-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR P V PRADEEP KUMAR
• Assessee Lawyers: S V RAVISHANKAR
• Keywords: Question of law; Deemed dividend
• Section: 234B; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA NO. 1706/BANG/2017 ASSESSMENT YEAR : 2012 - 13 MICROFINISH VALVES PRIVATE LIMITED, B-161/162, INDUSTRIAL ESTATE, GOKUL ROAD, HUBLI. PAN: AABCM 2527Q VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(1), HUBLI. APP ELL ANT RESPONDENT APPELLANT BY : SHRI S.V. RAVISHANKAR, ADV OCATE RES PONDENT BY : DR. P.V. PRADEEP K UMAR, ADDL.CIT(DR)(ITAT) , BENGALURU. DATE OF HEARING : 13.11 .201 8 DATE OF PRONOUNCEMENT : 16 .11 .201 8 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 05.05.2017 OF THE CIT(APPEALS), HUBLI RELATING TO ASSESSMENT Y EAR 2012-13. 2. THE FIRST ISSUE THAT ARISES FOR CONSIDERATION IN THIS APPEAL IS WITH REGARD TO THE ACTION OF THE REVENUE AUTHORITIES IN BRINGING TO TAX A SUM OF RS.4 CRORES AS DEEMED DIVIDEND U/S. 2(22)(E) OF THE INCOME-TAX ACT, 1961 [THE ACT]. ITA NO.1706/BANG/2017 PAGE 2 OF 13 3. THE FACTS WITH REGARD TO THE ABOVE SAID ADDITION ARE AS FOLLOWS. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MA NUFACTURE OF VALVES. THE ASSESSEE BORROWED A SUM OF RS.4 CRORES FROM M/S . MICOFINISH PUMPS PVT. LTD. ( MPPL ). THE AO NOTICED THAT THERE WERE COMMON DIRECTORS IN BOTH THE ASSESSEE COMPANY AND MPPL AND THEREFORE TH E SUM OF RS. 4 CRORES RECEIVED AS ADVANCE FROM MPPL WAS LIABLE TO BE ADDED AS DEEMED DIVIDEND U/S. 2(22)(E) OF THE ACT IN THE HANDS OF T HE ASSESSEE COMPANY. THE FOLLOWING TABLE WOULD SHOW THE COMMON SHAREHOLD ING AND THEIR SHARE HOLDING IN THE ASSESSEE COMPANY AS WELL AS MPPL: SL.NO. NAME OF THE DIRECTOR PERCENTAGE OF SHAREHOLDING IN THE ASSESSEE COMPANY PERCENTAGE OF HOLDING IN MICROFINISH PUMPS PVT. LTD. 1 SRI TILAK K. VIKAMSHI 2 4.99% 25% 2. SRI DEEPAK K. VIKA MSHI 24.99% 25% 3. SRI TUSHAR K. VIKAMSHI 24.99% 25% 4. SRI MAHENDRA K. VIKAMSHI 24.99% 25% 4. THE PLEA OF THE ASSESSEE BEFORE THE LOWER AUTHO RITIES WAS IT WAS NOT A SHAREHOLDER IN MPPL AND THEREFORE THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT CANNOT BE INVOKED IN THE HANDS OF ASSESSEE. IN OTHER WORDS, THE CONTENTION OF THE ASSESSEE WAS THAT THE FIRST CONDI TION TO BE SATISFIED FOR INVOKING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT WAS THAT THE ASSESSEE SHOULD BE A SHAREHOLDER IN THE COMPANY WHICH HAD GI VEN LOAN. THE OTHER CONTENTIONS PUT FORTH BY THE ASSESSEE WAS THAT THE FUNDS WERE GIVEN FOR THE BUSINESS PURPOSE, THEREFORE THE PROVISIONS OF SECTI ON 2(22)(E) COULD NOT BE APPLIED. THIS EXPLANATION WAS REJECTED BY THE AO F OR THE FOLLOWING REASONS:- 9. THE ASSESSEE'S EXPLANATION IS CONSIDERED CAREFU LLY, HOWEVER THE SAME IS FOUND TO BE NOT ACCEPTABLE. M/S MICROFINISH PUMPS PVT. LTD. IS NOT IN THE BUSINESS OF LENDING O F MONEY WITHIN ITA NO.1706/BANG/2017 PAGE 3 OF 13 THE MEANING OF THE PROVISIONS OF SECTION 2(22)(E) O F THE ACT. FURTHER, AS PER THE STATEMENT OF ACCOUNTS, M/S MICR OFINISH PUMPS PVT LTD., HAS SUFFICIENT RESERVES AND SURPLUS AS ON 31/03/2012. THE PROVISIONS OF SECTION 2(22)(E) ARE APPLICABLE ALSO TO THE ADVANCE OR LOAN MADE TO A CORPORATE ENTITY - SADHANA TEXTILES MILLS (P.) LTD. V. CIT [1991) 188 ITR 318 (BORN.). 10. IN VIEW OF THE ABOVE FACTS AND DISCUSSION, IT I S CONFIRMED THAT THE COMPANY. M/S MICROFINISH PUMPS PVT. LTD (W HEREIN THE DIRECTORS OF THE ASSESSEE COMPANY HAVE SUBSTANTIAL INTEREST I.E. SHAREHOLDING EXCEEDING 20%) HAVING SUFFICIENT 'ACCU MULATED PROFITS' AS ON DATES OF ADVANCES OF RS. 4,00,00,000 /- MADE TO THE ASSESSEE-COMPANY (WHEREIN THE DIRECTORS OF M/S. MIC ROFINISH PUMPS PVT. LTD. ARE HAVING SUBSTANTIAL INTEREST I.E . SHAREHOLDING EXCEEDING 20%). HENCE THE SAID ADVANCES OF RS. 4,00 ,00,000/ - AMOUNTS TO DEEMED DIVIDEND WITHIN THE MEANING OF TH E PROVISIONS OF SECTION 2(22)(E) OF THE ACT. ACCORDINGLY THE SAI D AMOUNT OF RS. 4,00,00,0001- IS ASSESSED TO TAX IN THE HANDS OF TH E ASSESSEE COMPANY. 5. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) CONF IRMED THE ORDER OF THE AO FOR THE FOLLOWING REASONS:- 14. BEFORE ME, THE ASSESSEE HAS FILED WRITTEN SUBM ISSION IN WHICH IT HAS CAME UP WITH NEW EXPLANATION STATING T HAT RS. 400 LAKHS RECEIVED IS NOT LOAN OR ADVANCE BUT IT IS AN INTER-CORPORATE DEPOSITS RECEIVED FROM MICRO-FINISH PUMPS PVT. LTD. APART FROM REPEATING THE SAME EXPLANATION AS WAS DONE BEFORE T HE ASSESSING OFFICER. WITH CASE LAWS. THE ASSESSEE HAS NOT ADDED ANYTHING. 15. IN VIEW OF THE ABOVE FINDINGS. IT IS VERY CLEAR THAT M/S. MICRO-FINISH TRADING PVT. LTD., (WHEREIN THE DIRECT ORS OF THE ASSESSEE COMPANY HAVE SUBSTANTIAL INTEREST I.E. SHA REHOLDING EXCEEDING 20%) HAS HUGE ACCUMULATED PROFITS AS ON D ATE OF ADVANCES OF RS. 400 LAKHS MADE TO THE ASSESSEE COMP ANY (WHEREIN THE DIRECTORS OF M/S. MICRO-FINISH PUMPS PVT. LTD., ARE HAVING SUBSTANTIAL INTEREST EXCEEDING 20%). AS SUCH THE SA ID ADVANCES OF RS. 400 LAKHS AMOUNTS TO DEEMED DIVIDEND WITHIN THE MEANING OF THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT, AND THE SAME IS RIGHTLY ITA NO.1706/BANG/2017 PAGE 4 OF 13 BROUGHT TO TAX IN THE HANDS OF THE ASSESSEE COMPANY . IN THE RESULT, THE APPEAL ON THIS GROUND IS DISMISSED . 6. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE ASSE SSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 7. THE GROUNDS RAISED BY THE ASSESSEE CHALLENGING T HE AFORESAID ADDITION ARE AS FOLLOWS:- 2. THE LEARNED CIT(A) WAS NOT JUSTIFIED IN LAW IN CONFIRMING THE ADDITION OF THE INTER CORPORATE DEPOSIT OF RS. 4,00,00,000/- AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT, IN THE HANDS OF THE APPELLANT ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 3. THE LEARNED CIT(A) WAS NOT JUSTIFIED IN LAW IN I GNORING THE FACT THAT THE APPELLANT DID NOT HOLD ANY SHARES IN M/S MICROFINISH PUMPS PVT LTD AND HENCE WAS NOT ELIGIBL E TO RECEIVE ANY DIVIDEND AND CONSEQUENTLY PROVISIONS OF SECTION 2(22)(E) OF THE ACT, ARE NOT APPLICABLE, ON THE FACTS AND CIRCU MSTANCES OF THE CASE. 4. THE LEARNED CIT(A) WAS NOT JUSTIFIED IN FACT IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER, IN HOLDING THA T THE APPELLANT HAS RECEIVED A LOAN FROM M/S MICROFINISH PUMPS PVT LTD, WHEN THE SAID RECEIPT WAS AN INTER CORPORATE DEPOSIT ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 5. THE LEARNED CIT(A) WAS NOT JUSTIFIED IN LAW IN H OLDING THAT THE DIRECTORS WERE COMMON IN BOTH THE COMPANIE S AND HENCE THE PROVISIONS OF SECTION 2(22)(E) WERE ATTRACTED, WHICH IS A NARROW INTERPRETATION OF THE PROVISIONS OF THE ACT, ON THE FACT AND CIRCUMSTANCES OF THE CASE. 8. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES ON GROUND NO.5 RAISED BY THE ASSESSEE WHICH IS WITH REGARD TO THE ACTION OF THE REVENUE AUTHORITIES IN INVOKING THE PROVISIONS OF SECTION 2 (22)(E) IN A CASE WHERE THE ASSESSEE IS NOT A SHAREHOLDER IN A COMPANY WHICH HA S GIVEN THE LOAN. ON THIS ISSUE, WE SHALL FIRST SET OUT THE PROVISIONS OF SEC.2(22)(E) OF THE ACT ITA NO.1706/BANG/2017 PAGE 5 OF 13 WHICH DEEMS CERTAIN LOANS TO BE DIVIDEND AND BRINGS IT TO TAX IN THE HANDS OF THE RECIPIENT OF THE LOAN. THE SAID PROVI SIONS READS THUS: (E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MADE AFTER THE 31-5-1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFICIAL O WNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVID END WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDI NG NOT LESS THAN TEN PER CENT OF THE VOTING POWER, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH H E HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFE RRED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER , TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUM ULATED PROFITS. EXPLANATION-3 TO SECTION 2(22)(E) IS AS FOLLOWS: EXPLANATION-3: FOR THE PURPOSE OF THIS CLAUSE- (A) CONCERN MEANS A HINDU UNDIVIDED FAMILY, OR A FIRM OR AN ASSOCIATION OF PERSONS OR A BODY OF INDIVIDUALS OR A COMPANY; (B) A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL INTEREST IN A CONCERN, OTHER THAN A COMPANY, IF HE IS, AT ANY TIM E DURING THE PREVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LESS TH AN TWENTY PERCENT OF THE INCOME OF SUCH CONCERN; 9. SECTION 2(32) DEFINES THE EXPRESSION PERSON WHO HAS A SUBSTANTIAL INTEREST IN THE COMPANY, IN RELATION TO A COMPANY, MEANS A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES, NOT BEING SHARES EN TITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICI PATE IN PROFITS, CARRYING NOT LESS THAN TWENTY PERCENT OF THE VOTING POWER. ITA NO.1706/BANG/2017 PAGE 6 OF 13 10. AN ANALYSIS OF THE ABOVE PROVISIONS SHOWS THAT THERE ARE THREE LIMBS TO SEC.2(22)(E) WHICH ARE AS FOLLOWS:- 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 31-5-1987 , BY WAY OF ADVANCE OR LOAN: FIRST LIMB (A) TO A SHAREHOLDER, BEING A PERSON WHO IS THE BEN EFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RAT E OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN P ROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING PO WER, SECOND LIMB (B) OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN) THIRD LIMB (C) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE P OSSESSES ACCUMULATED PROFITS. 11. IN THE PRESENT APPEAL WE ARE CONCERNED WITH THE SECOND LIMB OF SEC.2(22)(E) OF THE ACT, VIZ., TO ANY CONCERN IN W HICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTI AL INTEREST. THE FOLLOWING CONDITIONS ARE REQUIRED TO BE SATISFIED F OR APPLICATION OF THE ABOVE CATEGORY OF PAYMENT TO BE REGARDED AS DIVIDEND. TH EY ARE:- (A) THERE MUST BE A PAYMENT TO A CONCERN BY A COMPA NY. ITA NO.1706/BANG/2017 PAGE 7 OF 13 (B) A PERSON MUST BE SHAREHOLDER OF THE COMPANY BEI NG A REGISTERED HOLDER AND BENEFICIAL OWNER OF SHARES (N OT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER . THIS IS BECAUSE OF THE EXPRESSION SUCH SHAREHOLDER FOUND IN THE RELEVANT PROVISION. THIS EXPRESSION ONLY REFERS TO THE SHAR EHOLDER REFERRED TO IN THE EARLIER PART OF SEC.2(22)(E) VIZ ., A REGISTERED AND A BENEFICIAL HOLDER OF SHARES HOLDING 10% VOTIN G 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 N OT A COMPANY, HE MUST AT ANY TIME DURING THE PREVIOUS YE AR, BE BENEFICIALLY ENTITLED TO NOT LESS THAN TWENTY PERCE NT OF THE INCOME OF SUCH CONCERN; AND WHERE THE CONCERN IS A COMPANY HE MUST BE THE OWNER OF SHARES, NOT BEING SHARES EN TITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RI GHT TO PARTICIPATE IN PROFITS, CARRYING NOT LESS THAN TWEN TY PERCENT OF THE VOTING POWER (D) IF THE ABOVE CONDITIONS ARE SATISFIED THEN THE PAYMENT BY THE COMPANY TO THE CONCERN WILL BE DIVIDEND. 12. THE SPECIAL BENCH OF ITAT, MUMBAI, IN THE CASE OF BHAUMIK COLOR LABS ITA 5030/M/04, 118 ITD 1 (SB) (MUM) , CONSIDERED THE QUESTION WHETHER DEEMED DIVIDEND U/S. 2(22)(E) OF THE INCOME TAX ACT, 1961 CAN BE ASSESSED IN THE HANDS OF A PERSON OTHER THAN A S HAREHOLDER OF THE LENDER? THE SPECIAL BENCH HELD THAT DEEMED DIVIDEN D CAN BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THAN A SHARE HOLDER. THE SPECIAL BENCH ON THE ABOVE ISSUE HAS OBSERVED AS FOLLOWS:- 30. AT THE OUTSET IT HAS TO BE MENTIONED THAT PRO VISIONS OF SEC.2(22)(E) WHICH BROUGHT IN A NEW CATEGORY OF PAY MENT WHICH WAS TO BE CONSIDERED AS DIVIDEND AS INTRODUCED BY T HE FINANCE ACT 1987 W.E.F.1-4-88 VIZ., PAYMENT BY A COMPANY TO ANY CONCERN IN ITA NO.1706/BANG/2017 PAGE 8 OF 13 WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST DO NOT SAY AS TO IN WHOSE HANDS THE DIVIDEND HAS TO BE BROUGHT TO TAX, WHETHER IN THE H ANDS OF THE CONCERN OR THE SHAREHOLDER. WE HAVE ALREADY SE EN THE DIVERGENT VIEWS ON THIS ISSUE WHICH HAVE BEEN REFER RED TO IN THE EARLIER PART OF THIS ORDER. 31. THE ABOVE PROVISIONS WERE SUBJECT MATTER OF CO NSIDERATION BEFORE THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. HOTEL HILLTOP. 217 CTR 527(RAJ). THE FACTS OF THE CASE BEFORE THE HONBLE COURT WERE AS FOLLOWS. THE ASSESSEE WAS ON E M/S.HOTEL HILLTOP A PARTNERSHIP FIRM. THIS FIRM RECEIVED AN ADVANCE OF RS.10 LACS FROM A COMPANY M/S.HILLTOP PALACE HOTELS (P) L TD. THE SHAREHOLDING PATTERN OF M/S.HILLLTOP 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 HILL TOP WAS AS FOLLOWS: 1. SHRI ROOP KUMAR KHURANA: 45% 2. SHRI.DESHBANDHU KHURANA: 55% THE AO ASSESSED THE SUM OF RS.10 LACS AS DEEMED DIV IDEND U/S.2(22)(E) OF THE ACT IN THE HANDS OF THE FIRM BE CAUSE THE TWO PARTNERS OF M/S.HOTEL HILL TOP WERE HOLDING SHARES BY WHICH THEY HAD 10% VOTING POWER IN M/S.HILL TOP PALACE HOTELS (P) LTD. THEY WERE ALSO ENTITLED TO 20% OF THE INCOME OF THE FIRM M/S.HOTEL HILL TOP. THEREFORE THE LOAN BY M/S.HILL TOP PALACE HOTELS (P) LTD. TO THE FIRM M/S.HOTEL HILL TOP WAS TREATED AS DEEMED DIVIDEND IN THE HANDS OF M/S.HOTEL HILL TOP, THE FIRM UNDER THE SECOND LIMB OF SEC.2(22)(E) OF THE ACT. THE CIT(A) HELD THAT SINCE THE FIRM WAS NOT THE SHAREHOLDER OF THE COMPANY THE ASSESSMENT AS DEEMED DIVIDEND IN THE HANDS OF THE F IRM WAS NOT CORRECT. THE ORDER OF THE CIT(A) WAS CONFIRMED BY THE TRIBUNAL. ITA NO.1706/BANG/2017 PAGE 9 OF 13 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 THE CASE AND IN LAW THE LEARNED TRIBUNAL WAS JUSTIFIED IN UPHOLDING THE ORDER OF LEARNED CIT(A) DELETING THE ADDITION OF RS.10 LACS AS DEEMED DIVIDEND UNDER SEC TION 2(22)(E) OF THE IT ACT? THE HONBLE COURT HELD AS FOLLOWS:- THE IMPORTANT ASPECT, BEING THE REQUIREMENT OF SE CTION 2(22)(E) IS, THAT THE PAYMENT MAY BE MADE TO ANY CONCERN, IN WHICH SUCH SHAREHOLDER IS A MEMBER, OR THE PARTNER, AND IN WHICH HE HAS SUBSTANTIAL INTEREST, OR ANY PAYMENT BY ANY SUCH COMPANY, ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER . T HUS, THE SUBSTANCE OF THE REQUIREMENT IS THAT THE PAYMEN T SHOULD BE MADE ON BEHALF OF OR FOR THE INDIVIDUAL B ENEFIT OF ANY SUCH SHAREHOLDER, OBVIOUSLY, THE PROVISION I S INTENDED TO ATTRACT THE LIABILITY OF TAX ON THE PER SON, ON WHOSE BEHALF, OR FOR WHOSE INDIVIDUAL BENEFIT, THE AMOUNT IS PAID BY THE COMPANY, WHETHER TO THE SHAREHOLDER, OR TO THE CONCERNED FIRM. IN WHICH EVENT, IT WOULD FALL W ITHIN THE EXPRESSION DEEMED DIVIDEND. OBVIOUSLY, INCOME FROM DIVIDEND, IS TAXABLE AS INCOME FROM THE OTHER SOURC ES UNDER SECTION 56, AND IN THE VERY NATURE OF THINGS THE INCOME HAS TO BE OF THE PERSON EARNING THE INCOME. THE ASSESSEE IN THE PRESENT CASE IS NOT SHOWN TO BE ONE OF THE PERSONS, BEING SHAREHOLDER. OF COURSE, THE TWO INDI VIDUALS BEING R AND D. ARE THE COMMON PERSONS, HOLDING MORE THAN REQUISITE AMOUNT OF SHAREHOLDING AND ARE HAVIN G REQUISITE INTEREST, IN THE FIRM, BUT THEN, THEREBY THE DEEMED DIVIDEND WOULD NOT BE DEEMED DIVIDEND IN THE HANDS OF THE FIRM, RATHER IT WOULD OBVIOUSLY BE DEE MED DIVIDEND IN THE HANDS OF THE INDIVIDUALS, ON WHOSE BEHALF, OR ON WHOSE INDIVIDUAL BENEFIT, BEING SUCH SHAREHOL DER, THE AMOUNT IS PAID BY THE COMPANY TO THE CONCERN. T HUS, THE SIGNIFICANT REQUIREMENT OF SECTION 2(22)(E) IS NOT SHOWN TO EXIST. THE LIABILITY OF TAX, AS DEEMED DIV IDED, COULD BE ATTRACTED IN THE HANDS OF THE INDIVIDUALS, BEING THE SHAREHOLDERS, AND NOT IN THE HANDS OF THE FIRM. ITA NO.1706/BANG/2017 PAGE 10 OF 13 32. THE AFORESAID DECISION OF THE HONBLE RAJASTHA N HIGH COURT WHICH IS THE ONLY DECISION OF HIGH COURT, SHOULD BE SUFFICIENT TO ANSWER QUESTION NO.2 WHICH HAS BEEN REFERRED TO THE SPECIAL BENCH BY HOLDING THAT DEEMED DIVIDEND CAN BE ASSESS ED ONLY IN THE HANDS OF A PERSON WHO IS A SHAREHOLDER OF THE LENDE R COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLD ER. THE ARGUMENT OF THE LEARNED D.R. THAT THE HONBLE RAJAS THAN HIGH COURT DID NOT DEAL WITH THE SECOND LIMB OF SEC.2(22 )(E) OF THE ACT IS NOT CORRECT. 13. THE SPECIAL BENCH FURTHER HELD AS FOLLOWS:- 34. WE ARE OF THE VIEW THAT THE PROVISIONS OF SEC .2(22)(E) DOES NOT SPELL OUT AS TO WHETHER THE INCOME HAS TO BE TA XED IN THE HANDS OF THE SHAREHOLDER OR THE CONCERN(NON-SHAREHOLDER). THE PROVISIONS ARE AMBIGUOUS. IT IS THEREFORE NECESSAR Y TO EXAMINE THE INTENTION BEHIND ENACTING THE PROVISIONS OF SEC.2(2 2)(E) OF THE ACT. 35. THE INTENTION BEHIND ENACTING PROVISIONS OF SE CTION 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 S O DISTRIBUTED THE DIVIDEND INCOME WOULD BECAME TAXABLE IN THE HANDS O F THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED P ROFITS AS DIVIDEND, COMPANIES DISTRIBUTE THEM AS LOAN OR ADVA NCES TO SHAREHOLDERS OR TO CONCERN IN WHICH SUCH SHAREHOLDE RS 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 T REATED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF SE CTION 2(22)(E) IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDER. THE DE EMING PROVISIONS AS IT APPLIES TO THE CASE OF LOANS OR AD VANCES BY A COMPANY TO A CONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST, IS BASED ON THE PRESUMPTION THAT THE LOA N OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLD ERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. THE INTENTION O F THE LEGISLATURE IS THEREFORE TO TAX DIVIDEND ONLY IN TH E HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF THE CONCERN. ITA NO.1706/BANG/2017 PAGE 11 OF 13 36. THE BASIS OF BRINGING IN THE AMENDMENT TO SEC. 2(22)(E) OF THE ACT BY THE FINANCE ACT, 1987 W.E.F 1-4-88 IS TO ENS URE THAT PERSONS WHO CONTROL THE AFFAIRS OF A COMPANY AS WELL AS THA T OF A FIRM CAN HAVE THE PAYMENT MADE TO A CONCERN FROM THE COMPANY AND THE PERSON WHO CAN CONTROL THE AFFAIRS OF THE CONCERN C AN DRAWN THE SAME FROM THE CONCERN INSTEAD OF THE COMPANY DIRECT LY MAKING PAYMENT TO THE SHAREHOLDER AS DIVIDEND. THE SOURCE OF POWER TO CONTROL THE AFFAIRS OF THE COMPANY AND THE CONCERN IS THE BASIS ON WHICH THESE PROVISIONS HAVE BEEN MADE. IT IS THERE FORE PROPER TO CONSTRUE THOSE PROVISIONS AS CONTEMPLATING A CHARGE TO TAX IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF A NON-SHAREHOLDER VIZ., CONCERN. A LOAN OR ADVANCE RECEIVED BY A CONC ERN IS NOT IN THE NATURE OF INCOME. IN OTHER WORDS THERE IS A DEEMED ACCRUAL OF INCOME EVEN U/S.5(1)(B) IN THE HANDS OF THE SHAREHO LDER ONLY AND NOT IN THE HANDS OF THE PAYEE VIZ., NON-SHAREHOLDER (CONCERN). SEC.5(1)(A) CONTEMPLATES THAT THE RECEIPT OR DEEMED RECEIPT SHOULD BE IN THE NATURE OF INCOME. THEREFORE THE DEEMING FICTION CAN BE APPLIED ONLY IN THE HANDS OF THE SHAREHOLDER AND NO T THE NON- SHAREHOLDER VIZ., THE CONCERN. 37. THE DEFINITION OF DIVIDEND U/S.2(22)(E) OF THE ACT IS AN INCLUSIVE DEFINITION. SUCH INCLUSIVE DEFINITION EN LARGES THE MEANING OF THE TERM DIVIDEND ACCORDING TO ITS ORD INARY AND NATURAL MEANING TO INCLUDE EVEN A LOAN OR ADVANCE. ANY LOAN OR ADVANCE CANNOT BE DIVIDEND ACCORDING TO ITS ORDINAR Y AND NATURAL MEANING. THE ORDINARY AND NATURAL MEANING OF THE T ERM 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 DIVIDEND IS EXTENDED TO LOANS AND ADVANCES TO A S HAREHOLDER OR TO A CONCERN IN WHICH A SHAREHOLDER IS SUBSTANTIALL Y INTERESTED DEEMING THEM AS DIVIDEND IN THE HANDS OF A SHAREHOL DER 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 NATUR AL MEANING OF THE WORD DIVIDEND IS TAKEN AWAY. IN THE LIGHT OF T HE INTENTION ITA NO.1706/BANG/2017 PAGE 12 OF 13 BEHIND THE PROVISIONS OF SEC.2(22)(E) AND IN THE AB SENCE OF INDICATION IN SEC.2(22)(E) TO EXTEND THE LEGAL FICT ION TO A CASE OF LOAN OR ADVANCE TO A NON-SHAREHOLDER ALSO, WE ARE O F THE VIEW THAT LOAN OR ADVANCE TO A NON-SHAREHOLDER CANNOT BE TAXE D AS DEEMED DIVIDEND IN THE HANDS OF A NON-SHAREHOLDER. 14. THE AFORESAID VIEW HAS SINCE BEEN APPROVED IN S EVERAL DECISIONS RENDERED BY HONBLE HIGH COURT OF BOMBAY AND DELHI IN THE CASE OF CIT VS. UNIVERSAL MEDICARE PVT. LTD., 324 ITR 263 (BOM) , CIT VS. ANKITECH PVT.LTD. & OTHERS 340 ITR 14 (DEL.), NATIONAL TRAVEL SERVICES (2012) 249 CTR (DEL) 540 AND THE HONBLE KARNATAKA HIGH COURT IN THE CASE O F CIT VS. SARVA EQUITY (P) LTD., (2014) 111 DTR 207 (KARN.) AND THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. MADHUR HOUSING AND DEVELOPMENT CO. 401 ITR 152(SC) . SINCE THE ASSESSEE IN THE PRESENT CASE IS NOT A SHAREHOLDER IN THE LENDER COMPANY, WE ARE OF THE VI EW THAT THE ABOVE DECISION IS SQUARELY APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. 15. IN VIEW OF THE AFORESAID DECISION, WE ARE OF TH E VIEW THAT THE ACTION OF THE REVENUE AUTHORITIES IN BRING TO TAX A SUM OF RS.4 CRORES AS DEEMED DIVIDEND U/S.2(22)(E) OF THE ACT CANNOT BE SUSTAINE D AND THE SAID ADDITION IS DIRECTED TO BE DELETED. THE RELEVANT GROUND OF APP EAL OF THE ASSESSEE IS ALLOWED. 16. THE NEXT ISSUE THAT ARISES FOR CONSIDERATION IS WITH REGARD TO THE DISALLOWANCE U/S. 14A OF THE ACT. AS FAR AS THE DIS ALLOWANCE IS CONCERNED, THE SAME IS ONLY WITH REGARD TO DISALLOWANCE OF OT HER EXPENSES UNDER RULE 8D(2)(III) OF THE INCOME-TAX RULES, 1962 [THE RULES ]. THE ARGUMENT ADVANCED ON THIS ISSUE ARE GENERAL AND VAGUE. THE COMPUTATION HAS BEEN DONE BY THE AO IN ACCORDANCE WITH THE PROVISIONS OF RELEVANT RULE. NO CASE HAS BEEN MADE OUT BY THE ASSESSEE AS TO WHY TH E ACTION OF THE ITA NO.1706/BANG/2017 PAGE 13 OF 13 REVENUE AUTHORITIES IN THIS REGARD ARE NOT CORRECT. HENCE THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 17. THE OTHER GROUNDS WITH REGARD TO CHARGING OF IN TEREST U/S. 234B & 234C OF THE ACT ARE CONSEQUENTIAL AND THE AO IS DIR ECTED TO GIVE CONSEQUENTIAL RELIEF. 18. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 16 TH DAY OF NOVEMBER, 2018. SD/- SD/- ( INTURI R AMA RAO ) ( N.V . VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 16 TH NOVEMBER, 2018. / D ESAI S MURTHY / COPY TO: 1. APP ELL ANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.