Mahavir Inductomelt Pvt.Ltd., Ahmedabad V. The ACIT.,(OSD)-I,Range-4, Ahmedabad

ITA 1942/AHD/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 9908 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-01-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 21-10-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 04-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DIPAK SUTARIA
• Assessee Lawyers: ASHEEMBHAI L THAKKAR
• Keywords: Maximum Marginal Rate; Deemed dividend
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH AHMEDABAD BEFORE S/SHRI RAJPAL YADAV, JM, & MANISH BORAD, AM. ITA NO.1942/AHD/2011 ASST. YEAR: 2007-08 MAHAVIR INDUCTOMENT PVT. LTD., 7604, GIDC, PHASE-IV, VATVA, AHMEDABAD. VS ASST. CIT, (OSD)-1, RANGE-4, AHMEDABAD. APPELLANT RESPONDENT PAN AABCM 8848G AND ITA NO.2191/AHD/2011 ASST. YEAR: 2007-08 ASSTT. CIT, (OSD)-1, RANGE-4, AHMEDABAD VS MAHAVIR INDUCTOMENT PVT. LTD., 7604, GIDC, PHASE-IV, VATVA, AHMEDABAD. APPELLANT RESPONDENT PAN AABCM 8848G ASSESSEE BY SHRI ASHEEMBHAI L. THAKKAR, AR RESPONDENT BY SHRI DIPAK SUTARIA, SR.DR DATE OF HEARING: 21/10/2015 DATE OF PRONOUNCEMENT: 04/01/2016 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER. THESE TWO CROSS APPEALS ONE BY ASSESSEE AND THE OTHER BY REVENUE ARE DIRECTED AGAINST ORDER OF CIT(A)-VIII, AHMEDABAD, DATED 8.6.2011 IN APPEAL NO.CIT(A)-VIII/ACR.4/732/0 9-10. ITA NO. 1942 & 2191/AHD/2011 ASST. YEAR 2007-08 2 ASSESSMENT WAS FRAMED U/S 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT) VIDE ORDER DATED 17/12/2009 FOR ASST . YEAR 2007-08. 2. FIRST WE TAKE UP ASSESSEES APPEAL IN ITA NO.194 2/AHD/2011 FOR ASSESSMENT YEAR 2007-08. FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEAL :- 1. THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISAL LOWANCE OUT OF INTEREST EXPENSES @ 3% U/S 40A(2)(B) OF THE I.T. AC T., 1961. 2. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR MODIFY ANY OF THE GROUNDS OF APPEAL ON OR BEFORE THE DATE OF H EARING OF APPEAL. 3. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE AS SESSEE COMPANY WHICH IS ENGAGED IN THE BUSINESS OF SHIP BREAKING F ILED ITS RETURN OF INCOME FOR ASST. YEAR 2007-08 ON 29.10.2007 DECLARI NG TOTAL INCOME AT RS.47,11,510/-. THE CASE WAS SELECTED FOR SCRUTI NY ASSESSMENT AND NOTICE U/S 143(2) WAS ISSUED AND SERVED ON THE ASSESSEE. THE ASSESSING OFFICER COMPLETED THE ASSESSMENT BY MAKIN G ADDITION OF RS.14,02,522/- ON ACCOUNT OF EXCESS INTEREST CLAIME D TO BE PAID TO A PARTY COVERED U/S 40A(2)(B) OF THE ACT AND ADDITION OF RS.85,21,606/- ON ACCOUNT OF DEEMED DIVIDEND INCOME AND ACCORDINGL Y ASSESSED THE INCOME OF THE ASSESSEE AT RS.1,46,35,638/-. 4. AGGRIEVED, ASSESSEE WENT IN APPEAL BEFORE THE LD . CIT(A) WHO SUSTAINED THE ADDITION MADE U/S 40A(2)(B) AND DELET ED THE ADDITION MADE ON ACCOUNT OF DEEMED DIVIDEND. ASSESSEE IS IN APPEAL BEFORE ITA NO. 1942 & 2191/AHD/2011 ASST. YEAR 2007-08 3 THE TRIBUNAL AGAINST THE ACTION OF LD. CIT(A) IN CO NFIRMING THE DISALLOWANCE OUT OF INTEREST EXPENSES @ 3% U/S 40A( 2)(B) OF THE ACT. 5. THE LD. AR SUBMITTED THAT DURING THE YEAR REGULA R LOANS AND ADVANCES WERE RECEIVED AND PAID TO MR. K. K. BANSAL WHO IS ONE OF THE DIRECTORS OF THE COMPANY HAVING SUBSTANTIAL HOL DING IN THE COMPANY AND ASSESSEE HAS PAID INTEREST TO MR. K. K. BANSAL OF RS.17,55,132/- CALCULATED @ 15%. DURING THE YEAR AS SESSEE HAS ALSO GIVEN LOAN TO MAHAVIR ROLLING MILLS PVT. LTD. WHICH IS A SISTER CONCERN OF THE ASSESSEE COMPANY AND MR. K. K. BANSAL IS A M AJOR SHARE HOLDER IN MAHAVIR ROLLING MILLS P. LTD. AND INTERES T @ 12% HAS BEEN CHARGED FROM MAHAVIR ROLLING MILLS PVT. LTD. DUE TO THIS VERY REASON THAT ASSESSEE IS PAYING INTEREST 15% TO ITS DIRECT OR AND CHARGING 12% INTEREST FROM A SISTER CONCERN HAVING THE SAME DIRE CTOR AS WELL AS MAJOR SHARE HOLDER, THEREBY CHARGING EXCESS INTERES T @ 3% AND THEREFORE MADE DISALLOWANCE OF EXCESS INTEREST PAID AT RS.14,02,522/-. 6. THE LD. AR FURTHER SUBMITTED THAT ASSESSING OFFI CER HAS NOT GONE THROUGH THE COMPLETE FACTS OF THE ISSUE SPECIF ICALLY THE FLOW OF TRANSACTIONS BETWEEN THE ASSESSEE AND MR. K. K. BAN SAL AND THE ASSESSEE AND MAHAVIR ROLLING MILLS PVT. LTD. ASSESS ING OFFICER SHOULD HAVE APPRECIATED THE FACTS THAT IN THE CASE OF K. K . BANSAL THERE WAS CREDIT BALANCE OF RS.3,34,72,237/- AND DURING THE Y EAR THERE HAVE BEEN REGULAR TRANSACTIONS OF FUNDS OUTFLOW AND INFL OW AND AT THE END OF THE YEAR THE REMAINING CREDIT BALANCE IN A/C OF K. K. BANSAL WAS RS.48,31,275/-; WHICH MEANS THAT THE UNSECURED LOAN TAKEN HAS SUBSTANTIALLY REDUCED. SIMILARLY, IN CASE OF TRANSA CTION BETWEEN THE ITA NO. 1942 & 2191/AHD/2011 ASST. YEAR 2007-08 4 ASSESSEE AND MAHAVIR ROLLING MILLS THERE WAS NO OPE NING BALANCE AND REGULAR TRANSACTIONS OF FUND OUTFLOW AND INFLOW IN BETWEEN THE TWO COMPANIES HAVE TAKEN PLACE AND OVER ALL DURING THE YEAR TOTAL OF CREDIT ENTRIES IS RS.6,69,37,343/- AND TOTAL OF DEB IT ENTRIES EXCLUDING INTEREST PAID IS RS.65,05,700/- AND THE ACCOUNT HAS BEEN SQUARED UP AT THE END OF THE YEAR. THESE REGULAR TRANSACTIONS BETWEEN THE ASSESSEE COMPANY AND WITH ITS DIRECTOR AND SISTER C ONCERN SHOWS THAT THERE IS NO BASIC INTENTION TO CLAIM EXCESS IN TEREST AND THE TRANSACTIONS HAVE BEEN ENTERED IN A REGULAR COURSE OF BUSINESS AS REQUIRED TO BE MADE BETWEEN THE SISTER CONCERN. 7. LD. AR ALSO SUBMITTED THAT BOTH MR. K. K. BANSAL AND MAHAVIR ROLLING MILLS PVT. LTD. ARE REGULARLY ASSESSED TO I NCOME-TAX AND ARE PAYING TAXES AT THE MAXIMUM MARGINAL RATE AND THIS FURTHER STRENGTHEN THE CONTENTIONS THAT ASSESSEES OBJECT W AS NOT TO EVADE ANY TAX BY SUCH ARRANGEMENT. TO FURTHER STRENGTHEN HIS ARGUMENT LD. AR HAS RELIED ON THE DECISION OF HONBLE JURISDICTI ONAL HIGH COURT IN THE CASE OF PRINCIPAL CIT-2 VS. GUJARAT GAS FINANCI AL SERVICES LTD. (2015 60 TAXMANN.COM 483 (GUJARAT) (COPY OF DECISIO N IS PLACED ON RECORD). 8. THE LD. DR RELIED ON THE ORDERS OF LOWER AUTHORI TIES. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE BASIC REASON DUE TO WHICH ASSESSING OFFICER WENT AHEAD TO MAKE ADDITION OF RS.14,02,522/- ON ACCOUNT OF INTEREST RELATING TO THE PARTIES WAS THAT ASSESSEE PAID INTE REST @ 15% TO ITS ITA NO. 1942 & 2191/AHD/2011 ASST. YEAR 2007-08 5 DIRECTOR AND MAJOR SHARE HOLDER MR. K. K. BANSAL AN D CHARGED INTEREST @ 12% ON THE LOANS TO ITS SISTER CONCERN MAHAVIR RO LLING MILLS PVT. LTD. OF WHICH MR. K. K. BANSAL WAS A MAJOR SHARE HO LDER AND ASSESSING OFFICER TOOK A VIEW THAT ASSESSEE COMPANY HAS INTENTIONALLY MOVED THE FUNDS RECEIVED FROM MR. K. K. BANSAL BY PAYING 15% INTEREST AND PUT IT TO MAHAVIR ROLLING M ILLS PVT. LTD. AND CHARGED 12% INTEREST AND THEREBY CLAIMED EXCESS INT EREST BY 3% AND MADE ADDITION OF THIS EXCESS 3% INTEREST BEING MADE TO A RELATIVE UNDER THE PROVISIONS OF SEC.40A(2)(B) OF THE ACT AN D MADE ADDITION OF RS.14,02,522/-. 10. HOWEVER, CONSIDERING THE SUBMISSIONS OF LD. AR AND EXAMINING THE RECORDS AS WELL AS LEDGER A/C OF MR. K. K. BANS AL AND MAHAVIR ROLLING MILLS P. LTD. IN THE BOOKS OF ACCOUNT OF AS SESSEE, WE FIND SUFFICIENT FORCE IN THE SUBMISSIONS OF LD. AR. IN R EGARD TO THE INTEREST PAYMENT TO MR. K. K. BANSAL, WE OBSERVE THAT THE OP ENING CREDIT BALANCE IN THE A/C OF K. K. BANSAL STOOD AT RS.3,34 ,72,237.66 AND AFTER REGULAR OUTFLOW AND INFLOW OF FUNDS AT THE EN D OF THE YEAR THE CREDIT BALANCE HAS REDUCED TO RS.48,31,275/-. THIS MEANS THAT THE FUNDS FLOWED IN AND OUT IN THE A/C REGULARLY FOR TH E BUSINESS EXPEDIENCY AND HAD THERE BEEN ANY INTENTION TO CLAI M HIGHER INTEREST THEN THE CREDIT BALANCE OF K. K. BANSAL WOULD NOT H AVE REDUCED TO THIS EXTENT. SIMILARLY, WHILE GOING THROUGH THE LEDGER A /C OF MAHAVIR ROLLING MILLS WHERE THERE IS NO OPENING BALANCE AND THERE HAVE BEEN REGULAR TRANSACTIONS OF FUNDS RECEIVED AND PAID (AL MOST EVERY MONTH) AND COMING TO THE END OF THE YEAR THE A/C HAS BEEN SQUARED UP AND THIS SHOWS THAT THERE WERE REGULAR FLOW OF FUNDS FO R BUSINESS ITA NO. 1942 & 2191/AHD/2011 ASST. YEAR 2007-08 6 EXPEDIENCY WITH ITS SISTER CONCERN. IN THE CASE OF ANY ASSESSEE HAVING SISTER CONCERN AND COMMON DIRECTOR SUCH TYPE OF FUNDS MOVEMENT ARE QUITE NATURAL AND ARE MADE FOR THE SMO OTH RUNNING OF THE BUSINESS UNLESS AND UNTIL SOME SPECIFIC INTENTI ON COMES ACROSS FOR ANY TAX EVASION WHICH IS NOT THE CASE OF THE AS SESSEE BECAUSE FROM THE PERUSAL OF INCOME-TAX RETURNS & ACKNOWLEDG EMENT OF K. K. BANSAL AND MAHAVIR ROLLING MILLS FOR ASST. YEAR 200 7-08 WE FIND THAT BOTH OF THEM ARE ASSESSED TO MAXIMUM MARGINAL RATE AND THERE SEEMS TO BE NO INTENTION OF THE ASSESSEE TO EVADE T AXES. FURTHER, THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF PRINCIPAL CIT VS. GUJARAT GAS FINANCIAL SERVICES LTD. (SUPRA) SUPPORT S THE VIEW DISCUSSED ABOVE WHEREIN IT HAS BEEN HELD THAT IN A SITUATION WHEN THE ASSESSING OFFICER FOUND THAT ASSESSEE WAS USING SOM E SPACE OF THE PARENT COMPANY AND, THEREFORE, INITIATED PROCEEDING S U/S 40A(2)(B) AND DEDUCTED AND REMITTED RENT OF SPACE FROM SERVIC ES CHARGES IT WAS OBSERVED THAT AS ASSESSEE COMPANY AND PARENT COMPAN Y BOTH WERE TAXED AT MARGINAL RATE AND THEREFORE IT CANNOT BE S AID THAT SERVICE CHARGES PAID TO PARENT COMPANY ARE UNREASONABLE SO AS TO EVADE TAX AND, THEREFORE REVENUE COULD NOT POINT OUT THAT ASS ESSEE EVADED PAYMENT OF TAX AND IT WAS HELD THAT INVOCATION OF S ECTION 40A(2)(B) WAS NOT VALID. 11. WE FIND THAT APPLYING THE FACTS OF THE ISSUE IN APPEAL BEFORE US TO THE DECISION OF HONBLE JURISDICTIONAL HIGH COUR T REFERRED ABOVE AS WELL AS OUR OBSERVATIONS IN RELATION TRANSACTIONS E NTERED INTO BY THE ASSESSEE COMPANY WITH ITS DIRECTOR, K.K. BANSAL AND ITS SISTER CONCERN MAHAVIR ROLLING MILLS WERE NORMAL BUSINESS TRANSACTIONS AND ITA NO. 1942 & 2191/AHD/2011 ASST. YEAR 2007-08 7 DID NOT REFLECT ANY INTENTION OF THE ASSESSEE TO WI LL-FULLY EVADE TAX BY PAYING HIGHER RATE OF INTEREST AND THEREFORE, WE DE LETE THE ADDITION MADE BY ASSESSING OFFICER AND ALLOW THE GROUND OF A PPEAL OF ASSESSEE. 12. GROUND NO.2 IS OF GENERAL NATURE, WHICH REQUIRE S NO ADJUDICATION. 13. NOW WE TAKE UP CROSS APPEAL OF REVENUE IN ITA I TA NO.2191/AHD/2011 FOR ASST. YEAR 2007-08 WHEREIN FOL LOWING GROUNDS HAVE BEEN TAKEN UP :- 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.85,21,606/- ON ACCOUNT OF DEEMED DIV IDEND U/S. 2(22)(E) WITHOUT APPRECIATING THE FACT THAT THE ASS ESSING OFFICER HAD ESTABLISHED THAT THE PAYMENT MADE BY MAHAVIR RO LLING MILLS PVT. LTD. BY WAY OF ADVANCES IS COVERED UNDER THE PROVISIONS OF SECTION 2(22)(E). 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESS ING OFFICER. 3. IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE L D. CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED TO THE ABOVE EXTENT. 14. THE ONLY ISSUE TO BE DECIDED IN THIS APPEAL IS RELATING TO DELETION OF ADDITION OF RS.85,21,606/- ON ACCOUNT O F DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT BY LD. CIT(A). ITA NO. 1942 & 2191/AHD/2011 ASST. YEAR 2007-08 8 15. BRIEFLY STATED FACTS ARE THAT DURING THE ASSESS MENT PROCEEDINGS THE ASSESSING OFFICER OBSERVED THAT DURING THE YEAR UNDER APPEAL THE ASSESSEE COMPANY RECEIVED ADVANCE FROM MAHAVIR ROLL ING MILLS PVT. LTD. AMOUNTING TO RS.6,69,37,343/- AND THE MAXIMUM OUTSTANDING BALANCE WAS OF RS.3,21,53,500/- AND MR. K. K. BANSA L IS A COMMON SHARE HOLDER IN BOTH THE COMPANIES HAVING SUBSTANTI AL INTEREST TO THE EXTENT OF 99.99% SHARE HOLDING IN MAHAVIR ROLLING M ILLS AND 48.17 % SHARE HOLDING IN ASSESSEE COMPANY I.E. MAHAVIR INDU CTOMENT PVT. LTD. AND MAHAVIR ROLLING MILLS HAS ACCUMULATED PROF IT OF RS.3,28,34,197/- AND ASSESSING OFFICER WENT AHEAD T O MAKE ADDITION OF DEEMED DIVIDEND U/S 2(22)(E) AT RS. 85,21,606/- IN THE HANDS OF ASSESSEE COMPANY BY CALCULATING THE INCREASE IN ACC UMULATED PROFITS OF MAHAVIR ROLLING MILLS PVT. LTD. IN COMPARISON TO LAST YEAR. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A) WHO DELET ED THE ADDITION BY RELYING ON THE DECISION OF THE TRIBUNAL IN THE A SSESSEES OWN CASE FOR ASST. YEAR 2005-06 IN ITA NO.2349/AHD/2008 VIDE ORDER DATED 10/12/2010. 16. AGGRIEVED THE REVENUE IS NOW IN APPEAL BEFORE T HE TRIBUNAL. 17. LD. DR RELIED ON THE ORDER OF ASSESSING OFFICER WHEREAS THE LD. AR SUPPORTED THE ORDER OF CIT(A). 18. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. FROM GOING THROUGH THE FACTS OF THE CASE , WE FIND THAT MR. K. K. BANSAL IS A COMMON SUBSTANTIAL SHARE HOLDER I N ASSESSEE COMPANY AS WELL AS MAHAVIR ROLLING MILLS PVT. LTD. HOWEVER, THE ASSESSEE COMPANY IS NOT A SHARE HOLDER OF MAHAVIR R OLLING MILLS PVT. ITA NO. 1942 & 2191/AHD/2011 ASST. YEAR 2007-08 9 LTD. IN THE ASSESSMENT ORDER ASSESSING OFFICER HAS REFERRED TO THE ADVANCE RECEIVED FROM MAHAVIR ROLLING MILLS PVT. LT D. AT RS.6,69,37,343/- AND HAS FRAMED THE ASSESSMENT ORD ER BY MAKING ADDITION OF RS. 85,21,606/- BY TAXING IT IN THE HAN DS OF THE ASSESSEE AS A DEEMED DIVIDEND WITHOUT APPRECIATING THE FACT THAT DURING THE YEAR ASSESSEE COMPANY HAS NOT RECEIVED THE ADVANCES ONLY BUT HAS REGULARLY GIVEN FUNDS TO MAHAVIR ROLLING MILLS PVT. LTD. AND AS DISCUSSED IN THE APPEAL OF ASSESSEE THAT THESE TRAN SACTIONS ARE BEING CARRIED OUT REGULARLY FOR BUSINESS EXPEDIENCY. FUR THER AS REFERRED BY LD. AR THAT THIS ISSUE OF DEEMED DIVIDEND U/S 2(22) (E) HAS BEEN DEALT BY THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE FOR ASST. YEAR 2005-06 WHEREIN IT HAS BEEN DECIDED IN FAVOUR OF AS SESSEE BY OBSERVING AS UNDER :- 14. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROU GH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND FROM THE ASSESSMENT ORDER THAT THE ASSESSING OFFICER OBSERVED THAT M/S. MIPL IS A COMPANY IN WHICH THE PUBLIC IS NOT SUBSTANTIALLY INTEREST AND ONE OF THE DIRECTOR, SHRI K.K BANSAL HOLDS MORE THAN 20 % OF SHARE BOTH IN THE ASSESSEE- COMPANY AND M/S MRPL, THE AO FURTHER OBSERVED THAT AS PER THE BOOKS OF ACCOUNT, M/S. MRPL HAS ADVANCED HUGE SUM TO M/S MRPL I.E. TH E ASSESSEE-COMPANY AND MIPL HAVE SHOWN RESERVES AND SURPLUS AT RS.1,01,54, 414/-. THE AO THEREFORE OBSERVED THAT THE LOANS AND ADVANCES MADE BY MIPL T O MRML IS LIABLE TO TAXED AS DEEMED DIVIDEND. IN RESPONSE TO THE SHOW CAUSE NOTI CE ASKING THE ASSESSEE TO EXPLAIN WHY THE AMOUNT SHOULD NOT BE TREATED AS DEE MED DIVIDEND U/S.2(22)(E), THE ASSESSEE FILED WRITTEN SUBMISSIONS DATED 22-12-2007 WHICH HAD BEEN REPRODUCED BY THE AO AT PARA-7.3 IN ASSESSMENT ORDER. IT WAS EXPL AINED TO THE AO IN THE COURSE OF ASSESSMENT PROCEEDINGS THAT THE ASSESSEE-COMPANY IS NOT HOLDING A SINGLE SHARE IN MRML AND THE AFORESAID FACT CAN ALSO BE ASCERTAINED FROM THE CHART WHICH HAS BEEN PRODUCED BY THE A.O IN PARA-7.1 OF THE ASSESSMENT O RDER. THE AO WITHOUT APPRECIATING THE RELEVANT FACTS IN PROPER PERSPECTI VE AND THE DETAILED SUBMISSIONS FURNISHED BY THE ASSESSEE AND MADE ADDITION OF RS.1 ,01,54,414/-. WE FIND FROM THE ASSESSMENT ORDER THAT HE HAS NOT DEALT WITH THE ISS UE OF THE ASSESSEE THAT THE ASSESSEE-COMPANY IS NOT HOLDING EVEN A SINGLE SHARE OF MIPL AND NOW BEFORE US THE ASSESSEE HAS DEMONSTRATED THAT NO SHAREHOLDING IS HELD BY THE ASSESSEE- COMPANY OF MIPL. BUT EVEN OTHERWISE, THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF SPECIAL BENCH OF ITAT MUMBAI IN THE CASE OF ACIT V. BHAUMIK COLOUR (P) LTD. (2009) 118 ITD 1 (MUM)(SB), WHEREIN THE HONBLE SPE CIAL BENCH HAS HELD AS UNDER:- ITA NO. 1942 & 2191/AHD/2011 ASST. YEAR 2007-08 10 33. WE MAY ALSO TOUCH UPON CERTAIN OTHER ASPECTS OF THE ISSUE N THE LIGHT OF THE SUBMISSIONS MADE BEFORE US. THE TRIBUNAL IN THE CASE OF NIKKO TECHNOLOGIES (SUPRA), WHILE HOLDING THAT THE PAYMEN T 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 OBSER VATIONS. SECTION 2(22)(E) ONLY SPECIFIES THE CIRCUMSTANCES UNDER WHI CH A PAYMENT BY WAY OF LOAN/ADVANCE IS TO BE TREATED AS DEEMED DIVI DEND. ONCE IT IS DETERMINED THAT ANY PAYMENT BY WAY OF LOAN/ADVANCE FALLS WITHIN THE AMBIT OF SECTION 2(22)(E), THEN, IT HAS TO BE TREAT ED AS DIVIDEND EVEN THOUGH SUCH PAYMENT IN THE ORDINARY CIRCUMSTANCES M AY NOT BE CONSIDERED AS DIVIDEND. AT THIS POINT OF TIME, THE ROLE OF SECTION 2(22)(E) ENDS. IT NOWHERE PROVIDES AS TO WHO IS TO BE TAXED IN INSPECT OF SUCH INCOME. IT IS TO BE BORNE IN MIND THAT THE TAX CAN ONLY BE ASSESSED IN THE HANDS OF RIGHT PERSON AS HELD BY THE APEX COURT IN THE CASE OF ITO V. CH. ATCHALAH (1996) 218 ITR 239, AT PAGES 243-244. IN ORDER TO FIND OUT THE RIGHT PERSON, ONE HAS TO EXAMINE THE CHARGING P ROVISIONS OF THE ACT. SECTIONS 4 AND 5 OF THE ACT ARE THE CHARGING PROVIS IONS. THEREAFTER, THE TRIBUNAL HAS REFERRED TO THE PROVIS IONS OF SECTION 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 THEREAFTER REFER RED TO CIRCULAR NO.495 DATED SEPTEMBER 22, 1987, OF THE CENTRAL BOARD OF DIRECT TAXES WHEREIN IT HAS BEEN OPINED THAT DEEMED DIVIDEND WOULD BE TAXED IN THE H ANDS OF A CONCERN (NON- SHAREHOLDER) ALSO IF THE CONDITIONS MENTIONED IN TH E SECTION ARE SATISFIED. 34. WE ARE OF THE VIEW THAT THE PROVISIONS OF SECTI ON 2(22)(E) DO NOT SPELL OUT AS TO WHETHER THE INCOME HAS TO BE TAXED DIN THE HANDS OF THE SHARE-HOLDER OR THE CONCERN (NON-SHAREHOLDER). THE PROVISIONS ARE AMBIGUOUS. IT IS THEREFORE NECESSARY TO EXAMINE THE INTENTION BEHIND ENACTING THE PROVISION S OF SECTION 2(22)(E) OF THE ACT. 35. THE INTENTION BEHIND ENACTING THE PROVISIONS OF SECTION 2(22)(E) IS THAT CLOSELY HELD COMPANIES (I.E. COMPANIES IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED), WHICH ARE CONTROLLED BY A GROUP OF MEMBERS, EVEN TH OUGH THE COMPANY HAS ACCUMULATED PROFITS WOULD NOT DISTRIBUTE SUCH PROFI T AS DIVIDEND BECAUSE IF SO DISTRIBUTED THE DIVIDEND INCOME WOULD BECOME TAXABL E IN THE HANDS OF THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED P ROFITS AS DIVIDEND, COMPANIES DISTRIBUTE THEM AS LOAN OR ADVANCES TO SHAREHOLDER OR TO CONCERN IN WHICH SUCH SHAREHOLDERS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER. IN SUCH AN EVENT, BY THE DEEMING PROVISIONS SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22)(E) IS TO TAX DIVIDEND I N THE HANDS OF SHAREHOLDER. THE DEEMING PROVISIONS AS IT APPLIES TO THE CASE OF LOA NS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL IN TEREST, IS BASED ON THE RESUMPTION THAT THE LOAN OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. THE INTENTI ON OF THE LEGISLATURE IS THEREFORE TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDE R AND NOT IN THE HANDS OF THE CONCERN. ITA NO. 1942 & 2191/AHD/2011 ASST. YEAR 2007-08 11 36. THE BASIS OF BRINGING IN THE AMENDMENT TO SECTI ON 2(22)(E) OF THE ACT BY THE FINANCE ACT, 1987, WITH EFFECT FROM APRIL 1, 1998, IS TO ENSURE THAT PERSONS WHO CONTROL THE AFFAIRS OF A COMPANY AS WELL AS THAT OF A FIRM CAN HAVE THE PAYMENT MADE TO A CONCERN FROM THE COMPANY AND THE PERSON WHO CA N CONTROL THE AFFAIRS OF THE CONCERN CAN DRAW THE SAME FROM THE CONCERN INSTEAD OF THE COMPANY DIRECTLY MAKING PAYMENT TO THE SHAREHOLDER AS DIVIDEND. THE SOURCE OF POWER TO CONTROL THE AFFAIRS OF THE COMPANY AND THE CONCERN IS THE BASIS ON WHICH THESE PROVISIONS HAVE BEEN MADE. IT IS THEREFORE PROPER TO CONSTRUE THOSE PROVISIONS AS CONTEMPLATING A CHARGE TO TAX IN THE HANDS OF THE SHAREHOLDER AND N OT IN THE HANDS OF A NON- SHAREHOLDER VIZ., CONCERN. A LOAN OR ADVANCE RECEIV ED BY A CONCERN IS NOT IN THE NATURE OF INCOME. IN OTHER WORDS THERE IS A DEEMED ACCRUAL OF INCOME EVEN UNDER SECTION 5(1)(B) IN THE HANDS OF THE SHAREHOLDER ONL Y AND NOT IN THE HANDS OF THE PAYEE, VIZ., NON SHAREHOLDER (CONCERN). SECTION 5(1 )(A) CONTEMPLATES THAT THE RECEIPT OR DEEMED RECEIPT SHOULD BE IN THE NATURE OF INCOME . THEREFORE, THE DEEMING FICTION CAN BE APPLIED ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT THE NON SHAREHOLDER, VIZ., THE CONCERN. 37. THE DEFINITION OF DIVIDEND UNDER SECTION 2(22)( E) OF THE ACT IS AN INCLUSIVE DEFINITION. SUCH INCLUSIVE DEFINITION ENLARGES THE MEANING OF THE TERM DIVIDEND ACCORDING TO ITS ORDINARY AND NATURAL MEANING TO IN CLUDE EVEN A LOAN OR ADVANCE. ANY LOAN OR ADVANCE CANNOT BE DIVIDEND ACCORDING TO ITS ORDINARY AND NATURAL MEANING. THE ORDINARY AND NATURAL MEANING OF THE TERM DIVIDE ND WOULD BE A SHARE IN PROFITS TO AN INVESTOR IN THE SHARE CAPITAL OF A LIMITED COMPA NY. TO THE EXTENT THE MEANING OF THE WORD DIVIDEND IS EXTENDED TO LOANS AND ADVANCES TO A SHAREHOLDER OR TO A CONCERN IN WHICH A SHAREHOLDER IS SUBSTANTIALLY INT ERESTED DEEMING THEM AS DIVIDEND IN THE HANDS OF A SHAREHOLDER THE ORDINARY AND NATU RAL MEANING OF THE WORD DIVIDEND IS ALTERED. TO THIS EXTENT THE DEFINITION OF THE TE RM DIVIDEND CAN BE SAID TO OPERATE. IF THE DEFINITION OF DIVIDEND IS EXTENDED TO A LOAN OR ADVANCE TO A NON- SHAREHOLDER THE ORDINARY AND NATURAL MEANING OF THE WORD DIVIDEND IS TAKEN AWAY. IN THE LIGHT OF THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22)(E) AND IN THE ABSENCE OF INDICATION IN SECTION 2 (22)(E) TO EXTENDED THE LEGAL FICTION TO A CASE OF LOAN OR ADVANCE TO A NON-SHAREHOLDER ALSO, WE ARE OF THE VI EW 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 THE APEX COURT IN THE CASE OF KANTILAL MANILAL V. CIT [1961] 41 ITR 275 IS A SHAR E OF PROFITS OF THE COMPANY GIVEN TO ITS SHAREHOLDERS. FURTHER, SECTION 206 OF THE CO MPANIES ACT, 1956, PROHIBITS PAYMENT OF DIVIDEND TO ANY PERSON OTHER THAN THE RE GISTERED SHAREHOLDER. IF ONE WERE TO BREAK UP THE NATURAL MEANING THE FOLLOWING COMPO NENTS EMERGE (A) DIVIDEND IS A SHARE OF PROFITS OF THE COMPANY (B) PAID TO ITS SHA REHOLDERS. SECTION 2(22) OF THE ACT ARTIFICIALLY EXTENDS THE SCOPE OF DIVIDEND FROM BEI NG MORE THAN ONLY A DISTRIBUTION OF PROFITS TO COVER CERTAIN OTHER TYPES DISBURSEMENTS SUCH AS LOANS PAID, ETC. (THE FIRST INGREDIENT MENTIONED ABOVE). IT DOES NOT HOWEVER AL TER THE SECOND COMPONENT OF ITS NATURAL MEANING, VIZ., PAID TO ITS SHAREHOLDER. IN OTHER WORDS ALL THAT SECTION 2(22) SEEKS TO DO IS TO EXPAND THE VARIOUS TYPES PAYMENTS THAT MAY BE REGARDED AS DIVIDEND. THE APEX COURT WHILE CONSIDERING WHAT CAN COME WITHIN THE ARTIFICIAL DEFINITION OF DIVIDEND UNDER SECTION 2(22) IN THE C ASE OF CIT V. NALIN BEHARI LALL ITA NO. 1942 & 2191/AHD/2011 ASST. YEAR 2007-08 12 SINGHA [1969] 74 ITR 849 (SC) DESCRIBED THE SCOPE OF THE D EFINITION OF DIVIDEND THUS (PAGE 851 OF 74 ITR): 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 THE PROVISIONS OF SECTION 8(A) OF THE ACT CREATES 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 THEREFORE CLE AR THAT THE SHAREHOLDER ALONE CAN, IF AT ALL, BE SUBJECTED TO TAX FOR HAVING EARNED DIVID END. 39. IN THE DECISION OF THE TRIBUNAL IN THE CASE OF NIKKO TECHNOLOGIES LTD. (SUPRA) RELIANCE HAS BEEN PLACED ON CIRCULAR NO.495, DATED SEPTEMBER 22,1987 ([1987] 1568 ITR (ST.) 87), WHICH STATES AS FOLLOWS (PAGE 9 1): FURTHER, DEEMED DIVIDEND WOULD BE TAXED IN THE HAN DS OF A CONCERN WHERE ALL THE FOLLOWING CONDITIONS ARE SATISFIED. WE ARE OF THE VIEW THAT CIRCULAR OF THE CENTRAL BOA RD OF DIRECT TAXES TO THE EXTENT THAT THEY DO NOT TONE DOWN THE RIGOR OF THE PROVISI ONS 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 ECTION 2(22)(E)(III) PROVIDES RELIEF TO A SHAREHOLDER AS FOLLOWS: DIVIDEND DOES NOT INCLUDE, (I) & (II) (III) ANY DIVIDEND PAID BY ACCOMPANY 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-CLAUSE (E) TO TH E EXTENT 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 C ONCERN THEN, THE BENEFIT OF SET OFF CANNOT BE ALLOWED TO THE CONCERN, BECAUSE THE CONCE RN CAN NEVER RECEIVE DIVIDEND FROM THE COMPANY WHICH IS ONLY PAID TO THE SHAREHOL DER, WHO HAS SUBSTANTIAL INTEREST IN THE CONCERN. THE ABOVE PROVISIONS ALSO THEREFORE CONTEMPLATE DEEMED DIVIDEND BEING TAXED IN THE HANDS OF A SHAREHOLDER ONLY. FOR THE REASONS STATED ABOVE, WE ARE OF THE VIEW THAT THE LAW LAID DOWN IN THE CASE OF NIKKO TECHNOLOGIES LTD. (SUPRA) IS NOT CORRECT. WE, THEREFORE, HOLD THAT DEEMED DIV IDEND UNDER SECTION 2(22)(E) OF THE INCOME-TAX ACT, 1961, CAN BE ASSESSED ONLY IN THE H ANDS OF A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF ANY OTHER PE RSON. ITA NO. 1942 & 2191/AHD/2011 ASST. YEAR 2007-08 13 41. IN THE LIGHT OF THE ABOVE DISCUSSION, THE QUEST IONS REFERRED TO THE SPECIAL BENCH ARE ANSWERED AS FOLLOWS: ON THE FIRST QUESTION: DEEMED DIVIDEND CAN BE ASSES SED ONLY IN THE HANDS OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER. ON THE SECOND QUESTION: THE EXPRESSION SHAREHOLDER REFERRED TO IN SECTION 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 SECTION 2(22)(E) WILL NOT APPLY. 42. SIMILARLY IF A PERSON IS A BENEFICIAL SHAREHOLD ER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE PROVISIONS OF SECTION 2(2 2)(E) WILL NOT APPLY. IN VIEW OF THE ABOVE DISCUSSION, THERE IS NO MERIT INN THIS APPEAL BY THE REVENUE AND THE SAME IS, THEREFORE, DISMISSED.. 15. FURTHER, THE LD. COUNSEL FOR THE ASSESSEE RELIE D ON HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT V. HOTEL HILLTOP (2009) 313 ITR 116 (RAJ) WHEREIN IT IS HELD THAT IN ORDER TO ATTRACT THE PRO VISIONS OF SECTION 2(22)(E) OF THE ACT THE FOLLOWING FOUR CONDITIONS ARE THAT SINC E QUA NON : (A) THE ASSESSEE SHOULD BE A SHAREHOLDER OF THE COMPANY; (B) THE COM PANY SHOULD BE A CLOSELY HELD COMPANY IN WHICH THE PUBLIC ARE NOT SUBSTANTIA LLY INTERESTED; (C) THERE MUST BE PAYMENT BY WAY OF ADVANCE OR LOAN TO A SHAR EHOLDER OR ANY PAYMENT BY THE COMPANY ON BEHALF OF OR FOR THE INDIVIDUAL B ENEFIT OF THE SHAREHOLDER AND (D) THERE MUST BE SUFFICIENT ACCUMULATED PROFIT S IN THE HANDS OF THE COMPANY UP TO THE DATE OF SUCH PAYMENT. 16. WE FIND FROM THE ABOVE CASE LAW OF MUMBAI SPECI AL BENCH OF THIS ITAT, WHEREIN IT IS CATEGORICALLY HELD THAT THE DEEMED DI VIDEND 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. ACCORDINGLY, THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE, HENCE, WE CONFIRM THE ORDER OF CIT(A) DELETING THE ADDITION OF DEEMED DIVIDEND U/S.2(22)(E) OF THE ACT MADE BY ASSESSING OFFICER. THIS ISSUE OF THE REVENUES APPEAL IS DISMISSED. WE FIND THAT ISSUE IS SQUARELY COVERED IN FAVOUR OF ASSESSEE AND AGAINST THE REVENUE IN THE PRESENT CASE ALSO. RESPECTFULLY, FOL LOWING THE DECISION OF THIS TRIBUNAL IN ASSESSEES SISTER CONCERN IN THE CASE O F MAHAVIR ROLLING MILLS LTD. (SUPRA) WE UPHOLD THE ORDER OF CIT(A) AND THIS ISSUE OF REV ENUES APPEAL IS DISMISSED. AS THE FACTS DISCUSSED AND DECIDED BY THE CO-ORDINA TE BENCH IN ASSESSEES OWN CASE ARE SIMILAR TO THE FACTS OF THE PRESENT CASE, WE ARE OF THE CONSIDERED VIEW THAT AS THE ASSESSEE COM PANY IS NOT A ITA NO. 1942 & 2191/AHD/2011 ASST. YEAR 2007-08 14 SHARE HOLDER IN MAHAVIR ROLLING MILLS PVT. LTD., TH EREFORE, NO ADDITION COULD BE MADE U/S 2(22)(E) OF THE ACT, AS DEEMED DI VIDEND AND ACCORDINGLY, WE FIND NO REASON TO INTERFERE WITH TH E ORDER OF LD. CIT(A). WE UPHOLD THE SAME. THE GROUND RAISED BY THE REVENU E IS DISMISSED. 19. OTHER GROUNDS ARE OF GENERAL NATURE, WHICH NEED NO ADJUDICATION. 20. THE APPEAL FILED BY THE REVENUE IS DISMISSED. 21. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED AND THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 04/01/2016 SD/- SD/- (RAJPAL YADAV) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 04/01/2016 MAHATA/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, AHMEDABAD ITA NO. 1942 & 2191/AHD/2011 ASST. YEAR 2007-08 15 1. DATE OF DICTATION: 11/12/2015 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 18/12/2015 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 04/01/2016 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: