Addl. Commissioner of Income Tax, Amravati Circle,Amravati, Amaravati V. M/s. S.Navin Builders, Amaravati

ITA 22/NAG/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9650 (ITAT-NAGPUR)
• Duration Of Justice: 1 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2005-2006
• Appeal Filed On: 03-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAMESH DAWANDE
• Assessee Lawyers: S C THAKAR; C J THAKAR
• Keywords: Deemed dividend

Judgement Text

ITA NO. 22/NAG/2010 M/S. VASANT FINE ART LITH O WORKS, GONDIA IN THE INCOME TAX APPELLATE TRIBUNAL NAGPUR BENCH , NAGPUR BEFORE: SHRI P.K. BANSAL , ACCOUNTANT MEMBER AND SHRI D.T. GARASIA , JUDICIAL MEMBER ITA NO. 22 / NAG / 20 10 ASSESSMENT YEAR : 2006 - 07 DCIT, CIRCLE - 8 NAGPUR VS. M/S. VASANT FI NE ART LITHO WORKS GONDIA (APPELLANT) (RESPONDENT) PAN NO.AABFV 3052C APPELLANT BY: SHRI RAMESH DAWANDE, SR. DR RESPONDENT BY: SHRI C.J. THAKAR, ADVOCATE & SHRI S.C. THAKAR, ADVOCATE DATE OF HEARING: 10.10.12 DATE OF PRONOUNCEMENT: 17.10.12 ORDER PER P.K. BANSAL, ACCOUNTANT MEMBER: - THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT(A) DATED 23.11.2009. THE ONLY ISSUE IN THIS APPEAL IS THE DELETION OF THE ADDITION BY THE CIT(A) AS DEEMED DIVIDEND AMOUNTING TO RS.42,40,490/ - ADDED BY THE ASSESSING OFFICER INVOK ING THE PROVISIONS OF SECTION 2( 22 ) (E) OF THE INCOME - TAX ACT. 2. THE BRIEF FACTS OF THE CASE ARE THAT DURING THE COURSE OF THE ASSESSMENT, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS RECEIVED PAYMENTS FROM THE CLOSELY HELD COMPANY NAMELY VASANT LITHO AND OFFSET PRINTING (P) LTD., GONDIA. THE SHAREHOLDING PATTERN OF VASANT LITHO AND OFFSET PRINTING (P) LTD. AND THE ASSESSEE FIRM WAS NOTED AS UNDER: ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 2 LIST OF PARTNERS WITH THEIR PROFIT SHARING RATIOS IN THE FIR M AND PERCENTAGE OF SHARE HOLDING IN VASANT LITHO AND OFFSET PRINTING (P) LTD., GONDIA. SL.NO. NAME PROFIT SHARING RATIO IN FIRM PERCENTAGE OF SHARES IN M/S. VASANT LITHO AND OFFSET PRINTING (P) LTD., (RELATED PARTY) NO. OF SHARES 1. SHRI PRAKASH DHOTE 26% 12.98% 1000 2. SHRI SUNIL DHOTE 23% 12.98% 1000 3. SHRI SUSHIL DHOTE 13% 12.98% 1000 4. SHRI LOVE DHOTE 7% 18.18% 1400 5. SHRI GAURAV DHOTE 12.50% - - 6. SHRI MANGESH DHOTE 12.50% - - 7. MASTER JAY DHOTE 2% - - 8. MASTER PRATIK SUNIL DHOTE 2% - - 9. MASTER SANKET SUNIL DHOTE 2% - - 10. OTHERS 2% 42.88% 3300 3. ON THE BASIS OF SUCH SHAREHOLDING PATTERN, THE ASSESSING OFFICER NOTED THAT THE SHAREHOLDERS WHO HOLD SUBSTANTIAL INTEREST IN VASANT LITHO AND OFFSET PRINTING (P) LTD. A LSO ARE THE PAR TNERS IN ASSESSEE FIRM WITH SUBSTANTIAL SHAREHOLDING. HE ALSO NOTED THAT THE ASSESSEE HAS RECEIVED A SUM OF RS.42,30,419/ - FROM THE SAID CONCERN DURING THE YEAR. THEREFORE, HE TREATED THE SAID AMOUNT AS D EEMED DIVIDEND U/S 2( 22 ) (E). WHEN THE MATTER WENT BEFORE THE CIT(A), THE ASSESSEE REITERATED THE SUBMISSIONS AND FILED THE TRANSACTIONS DURING THE FINANCIAL YEAR 2005 - 06 WITH M/S. VASANT LITHO AND OFFSET PRINTING (P) LTD. IN THE SUMMARY MANNER AS UNDER: TRANSACTIONS DURING THE F.Y. 2005 - 06: OPENING CRE DIT BALANCE RS. 60,90,758 ADD: PURCHASE RS. 36,37,285 TOTAL RS.97,28,043 LESS: PAYMENTS MADE DURING THE YEAR RS. 39,46,600 CREDIT BALANCE STANDING IN THE ACCOUNT ------------------- OF LTD. COMPANY RS.57,82,043 ------------------ - 4. IT WAS CONTENDED THAT DURING THE YEAR, THE ASSESSEE MADE PURCHASES OF RS.36,37,285/ - FROM M/S. VASANT LITHO AND OFFSET PRINTING (P) LTD. FOR THE INK AND HAD MADE THE PAYMENTS AGAINST THE OUTSTANDING BALANCE AMOUNT OF RS.39,46,600/ - . ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 3 IT WAS CONTENDED THAT NO TRANSACTIONS, OTHER THAN THE TRADE RELATED TRANSACTIONS WERE CARRIED OUT DURING THE PREVIOUS YEAR AND THE TRANSACTIONS WERE SIMPLY COMMERCIAL TRANSACTIONS , WHICH DO NOT FALL WITHIN THE PURVIEW OF SECTION 2 ( 22 ) (E). THE CIT(A) , CONSIDERING THE DECIS ION OF THE DELHI HIGH COURT IN THE CASE OF CIT VS. AMBASSADOR TRAVELS (P) LTD. 318 ITR 376 (DELHI) AND CIT VS. RAJKUMAR 318 ITR 462 (DELHI), TOOK THE VIEW THAT THE PROVISIONS OF SECTION 2 ( 22 ) (E) ARE NOT APPLICABLE IN THE CASE OF THE ASSESSEE AND DELETED TH E ADDITION SO MADE. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME ALONG WITH THE ORDER OF THE TAX AUTHORITIES BELOW. QUESTION INVOLVED BEFORE US IS WHETHER THE SUM OF RS.42,40,419/ - ARE ASSESSABLE AS DEEMED DIVIDEND U/S 2(22)(E ) OF THE INCOME - TAX A CT IN THE HANDS OF THE ASSESSEE? THE ASSESSEE CLAIMED THAT THE PAYMENTS WERE AGAINST THE COMMERCIAL TRANSACTION ENTERED INTO BY THE ASSESSEE AND THE PAYMENTS WERE ONLY RS.39,46,600/ - THE PAYMENT REPRESENT THE COST OF THE SUPPLIES OF THE INK USED IN THE BUSINESS OF THE ASSESSEE. IT ALSO CLAIMS THAT IF THE OPENING BALANCE AND THE CLOSING BALANCE OF VASANT LITHO AND OFFSET PRINTING (P) LTD. IS COMPARED, IN FACT THERE IS NO LOAN OR ADVANCE MADE DURING THE YEAR. THE PAYMENT MADE DURIN G THE YEAR ARE OFFSET AGAINST THE SUPPLIES OF INK. THIS WAS ALSO CONTENDED THAT ASSESSEE FIRM IS NOT THE SHAREHOLDER OF M/S. VASANT LITHO AND OFFSET PRINTING (P) LTD. IT IS ONLY SOME PARTNERS OF THE FIRM WHO WERE THE SHAREHOLDERS OF M/S. VASANT LITHO AND OFFSET PRINTING (P) LTD. THEREFORE, HE DISPUTED WHETHER THE AMOUNT EVEN IF TREATED AS DIVIDEND CANNOT BE ASSESSED IN THE HANDS OF A PERSON OTHER THAN THE SHAREHOLDER. BEFORE DECIDING THIS POSITION, IT WOULD BE BETTER TO EXAMINE THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. SECTION 2(22)(E) AS AMENDED W.E.F. 1.4.88 READS AS UNDER: '(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 31ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROF ITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 4 (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SU CH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS.' 6. THIS SECTION WHICH IS EQUIVALENT TO SECTION 2(6A)(E) OF THE INCOME - TAX ACT, 1922 WAS FOR T HE FIRST TIME INTRODUCED AS BY THE FINANCE ACT, 1955 WHICH STATES AS FOLLOWS : - (A) 'ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED WITHIN THE MEANING OF SECTION 23A, OF ANY SUM (WHETHER AS REPRESENTING A PART O F THE ASSETS OF THE COMPANY OR OTHERWISE) BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF A SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PRO FITS.' 7. PRIOR TO 1 ST APRIL 1988, SECTION 2(22) OF THE INCOME - TAX ACT, 1961 DEFINES DIVIDEND AS FOLLOWS : 'SECTION 2(22) 'DIVIDEND' INCLUDES (A) TO (D) .. (E) ANY PAYMENT MADE BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIA LLY INTERESTED, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO HAS A SUBSTANTIAL INTEREST IN THE COMPANY, OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS.' 7.1 UNDER THE INCOME - TAX ACT, 1922, TWO CATEGORIES OF PAYMENT WERE CONSIDERED AS DIVIDEND VIZ. (A) ANY PAYMENT BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER , OR (B) ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF A SHAREHOLDER. 8 . IN THE 1961 ACT, FOR THESE VERY SAME PAYMENTS, AN ADDITIONAL CONDITION WAS INTRODUCED THAT THE PAYMENT SHOULD BE TO A SHAREHOLDER BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES AND WHO HAS A SUBSTANTIAL INTEREST IN THE COMPANY I.E. A SHAREHOLDING WHICH CARRIES NOT LESS THAN 20% OF THE VOTING POWER. THIS PERCENTAGE OF VOTING POWER WAS REDUCED FROM 20% TO 10% WITH EFFECT FROM 1ST APRIL, 1988 BY THE 1987 AMENDMENT. BY THE VERY SAME AMENDMENT, PAYMENT TO ANY CONCERN IN ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 5 WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST WAS ALSO CONSIDERED AS DIVIDEND. AS PER SECTION 2(32) THE EXPRESSION 'PERSON WHO HAS A SUBSTANTIAL INTEREST IN THE COMPANY', IN RELATION TO A COMPANY, MEANS A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES, NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROF ITS, CARRYING NOT LESS THAN 20% OF THE VOTING POWER. 'SUCH SHAREHOLDER' IS THE SHAREHOLDER WHO IS A REGISTERED AND A BENEFICIAL HOLDER OF SHARES HOLDING 10% VOTING POWER. THE ASSESSEE IS NEITHER A REGISTERED NOR BENEFICIAL HOLDER OF THE SHARES. 9 . THROUGH THIS SUB - CLAUSE, DEEMING FICTION IS CREATED WHEREBY THE SCOPE AND AMBIT OF THE WORD DIVIDEND HAS BEEN ENLARGED TO BRING WITHIN ITS COVER, LOANS GRANTED BY CLOSELY HELD COMPANIES TO THEIR SHAREHOLDERS. IN ORDER TO HAVE A CHECK ON SIMILAR TRANSACTIONS, TH E LEGISLATION WIDENS THE SCOPE OF THE TERM DIVIDEND TO INCLUDE LOANS GRANTED TO SHAREHOLDER BY THE CLOSELY HELD COMPANIES. THE WORD DEEMED HAS NOT BEEN DEFINED ANYWHERE IN THE ACT. NEITHER HAS THE WORD BEEN USED IN SECTION 2(22)(E). DEEMED DIVIDEND I S THEREFORE A LEGAL FICTION CREATED WHEREIN CERTAIN PAYMENTS BY COMPANIES ARE DEEMED TO BE DIVIDENDS. THIS IS A SETTLED LAW IN VIEW OF THE DECISIONS OF APEX COURT IN THE CASE OF STATE OF BOMBAY VS. PANDURANG VINAYAK CHAPHALKAR (1953) SCR 773 THAT LEGAL FIC TIONS ARE CREATED ONLY FOR A DEFINITE PURPOSE AND THEY ARE LIMITED TO THE PURPOSE FOR WHICH THEY ARE CREATED AND CANNOT EXTEND BEYOND THEIR LEGITIMATE FIELD. THE LEGAL FICTION IS OF COURSE TO BE CARRIED TO ITS LOGICAL CONCLUSION, BUT THAT MUST BE WITHIN TH E FRAMEWORK OF THE PURPOSE FOR WHICH IT IS CREATED. THE COURTS MUST ASSUME THAT SUCH A STATE OF AFFAIRS EXISTS AS REAL, AND SHOULD IMAGINE AS REAL THE CONSEQUENCES AND INCIDENTS WHICH INVARIABLY FLOW THEREFROM, AND GIVE EFFECT TO THEM. FURTHER, A DEEMING P ROVISION MAY BE INTENDED TO ENLARGE THE MEANING OF A PARTICULAR WORD OR TO INCLUDE MATTERS WHICH OTHERWISE MAY OR MAY NOT FALL WITHIN THE MAIN PROVISION [G. VISWANATHAN VS. HON BLE SPEAKER, TAMIL NADU LEGISLATIVE ASSEMBLY (1996) 2 SCC 353 (SC)]. THIS PROVI SION, THUS, WOULD NECESSARILY BE ACCORDED STRICT INTERPRETATION AND THE AMBIT OF THE FICTION WOULD NOT BE PRESSED BEYOND ITS TRUE LIMITS. IT IS NOW A WELL SETTLED LAW THAT THE FICTION IS TO BE CARRIED TO ITS LOGICAL END HOWEVER, AT THE SAME TIME, IT CAN AL SO NOT BE EXPANDED SO ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 6 AS TO INCLUDE THE FACTS WHICH REQUIRE SUBSTANTIAL MODIFICATION AS COMPARED TO THE FACTS TO BE CAPTURED AS PRESCRIBED BY THE LEGISLATURE. 10 . FROM THE READING OF SECTION 2(22)(E), IT IS APPARENT THAT IT HAS THE EFFECT OF BRINGING TO TAX AS DIVIDEND BELOW REFERRED TYPES OF PAYMENTS MADE BY A COMPANY: ANY PAYMENT OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER (EXTENDED TO PAYMENT TO CONCERNS IN WHICH SHAR EHOLDER HOLDS SUBSTANTIAL INTEREST); ANY PAYMENT ON BEHALF OF A SHAREHOLDER; ANY PAYMENT FOR THE INDIVIDUAL BENEFIT OF A SHAREHOLDER. 11 . ANY OF THE ABOVE REFERRED PAYMENTS WOULD BE TAXED UNDER THIS SUB - CLAUSE IF FOLLOWING THREE CONDITIONS ARE FULFILLED: THE COMPANY NOT TO BE THE ONE IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED WITHIN THE MEANING OF SECTION 2(18); IF THE ADVANCE OR LOAN IS MADE AFTER 31 MAY, 1987 TO A SHAREHOLDER WHO BENEFICIALLY OWNS AT LEAST 10 PER CENT OF THE EQUITY CAPITAL, OR TO A CONCERN IN WHICH HE IS MEMBER / PARTNER AND IS BENEFICIALLY ENTITLED TO NOT LESS THAN 20% OF INCOME OF THE CONCERN. THE COMPANY SHOULD POSSESS ACCUMULATED PROFITS AT THE TIME IT MAKES THE PAYMENT, THE PAYMENT BEING DEEMED TO BE DIVIDEND ONLY TO THE EXT ENT OF SUCH PROFITS. 1 2 . A LOAN OR ADVANCE TO A SHAREHOLDER IS DEEMED AS DIVIDEND, IRRESPECTIVE OF THE PURPOSE OF THE LOAN OR ADVANCE OR PERIOD OF THE LOAN/ADVANCE. UNDER THIS SUB - CLAUSE THE DEEMED DIVIDEND IS TO THE EXTENT OF THE ENTIRE ACCUMULATED PRO FITS AND NOT MERELY A PORTION OF SUCH PROFITS PROPORTIONATE TO THE ASSESSEE S SHAREHOLDING IN THE CAPITAL OF THE COMPANY. IF THE ACCUMULATED PROFITS ARE CAPITALIZED, THEY CANNOT BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF THIS SUB - CLAUSE. SIMILARLY, WHEN AN AMOUNT LENT HAS ALREADY BEEN CONSIDERED FICTIONALLY TO BE DIVIDEND, THE SAME AMOUNT WHEN REPAID AND RELENT CANNOT AGAIN ATTRACT THE FICTION AND BE ONCE AGAIN DEEMED TO BE DIVIDEND. THEREFORE, IN CONSIDERING THE TAXABILITY OF SUBSEQUENT TRANSACTIONS, THE AC CUMULATED PROFITS SHOULD BE NOTIONALLY REDUCED BY THE AMOUNT OF ALL LOANS AND OTHER BENEFITS WHICH WERE ONCE DEEMED TO BE DIVIDEND. ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 7 1 3 . FURTHER, IN ORDER TO ATTRACT THE APPLICATION OF THIS CLAUSE, THE PERSON SHOULD BE A SHAREHOLDER AND HE SHOULD BENEFICIA LLY OWN AT LEAST TEN PER CENT OF THE EQUITY CAPITAL. A SHAREHOLDER MEANS A PERSON IN WHOSE NAME THE SHARES STAND IN THE SHARE REGISTER OF THE COMPANY; THEREFORE, IF A PERSON IS MERELY THE BENEFICIAL OWNER OF SHARES, WITHOUT BEING THE REGISTERED SHAREHOLDER , THIS CLAUSE WOULD NOT APPLY TO HIM. 1 4 . SECTION ALSO PRESCRIBES AN EXCEPTION TO THE ABOVE RULE. SUCH EXCEPTION APPLIES WHERE TWO CUMULATIVE CONDITIONS ARE SATISFIED FIRSTLY, THE LOAN SHOULD HAVE BEEN MADE BY THE COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS, AND SECONDLY, MONEY LENDING SHOULD BE A SUBSTANTIAL PART OF THE COMPANY S BUSINESS. 1 5 . FURTHER, THE SECTION ALSO GIVES RELIEF BY PROVIDING THAT ANY SUBSEQUENT DIVIDEND DECLARED BY THE COMPANY AND SET - OFF AGAINST THE LOAN OR ADVANCE, WHICH HAS BEEN DEEMED AS DIVIDEND UNDER SUB - CLAUSE (E), THEN TO THE EXTENT OF SUCH SET - OFF, IT WOULD NOT BE AGAIN TREATED AS DIVIDEND. THAT IS TO SAY, IF THE DIVIDEND IS NOT SO SET OFF BUT IS PAID TO THE SHAREHOLDER WHILE THE LOAN REMAINS OUTSTANDING, THE BENEFIT OF SUB - CL (III) CANNOT BE OBTAINED. 1 6 . SHAREHOLDER HAS NOT BEEN DEFINED AND IN ABSENCE OF SPECIFIC DEFINITION IT WILL ONLY REFER TO REGISTERED SHAREHOLDER. IN THE CASE OF CIT VS. C.P. SARATHY MUDALIAR 83 ITR 170 (SC) AS RELIED BY LD. AR, THE PROVISIONS OF SECTION 2(6A)(E) OF THE ACT, 1922, WHICH WAS SYNONYMOUS TO SECTION 2(22)(E) OF THE INCOME - TAX ACT, 1961, CAME UP FOR CONSIDERATION. IN THE SAID CASE, MEMBERS OF HUF ACQUIRED SHARES IN A COMPANY WITH THE FUND OF THE FAMILY. LOANS WERE GRANTED TO HUF AND THE QUESTION WAS WHETHER THE LOANS COULD BE TREATED AS DIVIDEND INCOME OF THE FAMILY FALLING WITHIN SECTION 2(6A)(E) OF THE ACT, 1922. THE APEX COURT HELD THAT ONLY LOANS ADVANCED TO SHAREHOLDERS COULD BE DEEMED TO BE DIVIDENDS UNDER SECTION 2(6A)(E) OF T HE ACT; THE HUF COULD NOT BE CONSIDERED TO BE A SHAREHOLDER UNDER SECTION 2(6A)(E) OF THE ACT AND HENCE, LOANS GIVEN TO THE HUF WILL NOT BE CONSIDERED AS LOANS ADVANCED TO 'SHAREHOLDER' OF THE COMPANY AND COULD NOT, THEREFORE, BE DEEMED TO BE ITS INCOME. ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 8 THE APEX COURT FURTHER HELD THAT WHEN THE ACT SPEAKS OF SHAREHOLDER IT REFERS TO THE REGISTERED SHAREHOLDER. THE AFORESAID DECISION OF THE APEX COURT IN THE CASE OF C.P. SARATHY MUDALIAR (SUPRA) HAS BEEN REITERATED BY THE APEX COURT IN THE CASE OF RAMESHW ARLAL SANWARMAL VS. CIT 122 ITR 1 (SC). IT IS CLEAR FROM THE AFORESAID PRONOUNCEMENT OF THE SUPREME COURT THAT TO ATTRACT THE PROVISIONS OF SECTION 2(22)(E) THE PAYMENT MUST BE TO A PERSON WHO IS A REGISTERED HOLDER OF SHARES. IN THE INSTANT CASE THE ASSE SSEE FIRM IS NOT THE REGISTERED SHAREHOLDER OF M/S VASANT LITHO & OFF SET PRINTING PVT. LTD. 1 7 . THE CONDITION UNDER THE INCOME TAX ACT, 1961 REGARDING THE PAYEE BEING A SHAREHOLDER REMAINS THE SAME AS IT WAS UNDER THE INCOME - TAX ACT, 1922 AND THE CONDITI ON THAT SUCH SHAREHOLDER SHOULD BE BENEFICIAL OWNER OF THE SHARES AND THE PERCENTAGE OF VOTING POWER THAT SUCH SHAREHOLDER SHOULD HOLD HAS BEEN PRESCRIBED AS AN ADDITIONAL CONDITION UNDER THE PRESENT LAW. IN THE ACT, THE WORD 'SHAREHOLDER' IS FOLLOWED BY T HE EXPRESSION 'BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES'. THIS EXPRESSION USED IN SECTION 2(22)(E) BOTH IN THE ACT, AND IN THE AMENDED PROVISIONS WITH EFFECT FROM 1ST APRIL, 1988 ONLY QUALIFIES THE WORD 'SHAREHOLDER' AND DOES NOT IN ANY WAY ALT ER THE POSITION THAT THE SHAREHOLDER HAS TO BE A REGISTERED SHAREHOLDER. THEREFORE, DECISIONS OF THE APEX COURT IN THE CASE OF CIT VS. SARATHY MUDALIAR (SUPRA) AND THAT OF RAMESHWARLAL SANWARMAL VS. CIT (SUPRA) INTERPRETING THE TERM 'SHAREHOLDER' UNDER TH E INCOME - TAX ACT, 1922, IN OUR OPINION, IS EQUALLY APPLICABLE TO SECTION 2(22)(E) AS IS IN EXISTENCE TODAY. THIS ALSO DOES NOT REDUCE THE REQUIREMENT OF BEING A REGISTERED SHAREHOLDER TO A REQUIREMENT OF MERELY HOLDING A BENEFICIAL INTEREST IN THE SHARES W ITHOUT BEING A REGISTERED HOLDER OF SHARES. THE EXPRESSION 'BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES' IS THEREFORE A FURTHER REQUIREMENT BEFORE A SHAREHOLDER CAN BE SAID TO FALL WITHIN THE PARAMETERS OF SECTION 2(22)(E) OF THE ACT. IN THE ACT, SECTION 2(22)(E) IMPOSES A FURTHER CONDITION THAT THE SHAREHOLDER HAS ALSO TO BE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER. ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 9 1 8 . THE EXPRESSION 'SHAREHOLDER BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES' REFERRED TO IN SECTION 2(22)(E) REFERS TO BOTH A REGISTERED SHAREHOLDER AND BENEFICIAL SHAREHOLDER. IF A PERSON IS A REGISTERED SHAREHOLDER BUT NO T THE BENEFICIAL SHAREHOLDER, THEN THE PROVISIONS OF SECTION 2(22)(E) WILL NOT APPLY. SIMILARLY IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE PROVISIONS OF SECTION 2(22)(E) WILL NOT APPLY. MUMBAI ITAT SPECIAL BENCH IN THE CASE OF ACIT VS. BHAUMIK COLOUR P. LTD., 313 ITR (AT) 147 (MUMBAI) [SB] HAS HELD THAT FOR THE PURPOSE OF DEEMED DIVIDEND UNDER SECTION 2(22)(E), THE SHAREHOLDER MUST BE BOTH REGISTERED AND BENEFICIAL SHAREHOLDER ON WHICH THE LD. AR HAS HEAVILY RELIE D. 1 9 . UNTIL 1987, ONLY PAYMENTS TO SHAREHOLDERS WERE DEEMED AS DIVIDEND UNDER SUB - CLAUSE (E). HOWEVER, WITH EFFECT FROM 1ST APRIL, 1988, PAYMENT TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTERE ST WAS ALSO INCLUDED IN DEEMING FICTION OF SECTION 2(22)(E). EXPLANATION 3 TO SECTION 2(22) DECLARES THAT A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL INTEREST IN A CONCERN, OTHER THAN A COMPANY, IF HE IS, AT ANY TIME DURING THE PREVIOUS YEAR, BENEFICI ALLY ENTITLED TO NOT LESS THAN TWENTY PER CENT OF THE INCOME OF SUCH CONCERN . IN RELATION TO A COMPANY, SECTION 2(32) DEFINES THE EXPRESSION 'PERSON WHO HAS A SUBSTANTIAL INTEREST IN THE COMPANY', TO MEAN A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES, NO T BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS, CARRYING NOT LESS THAN 20% OF THE VOTING POWER. IF THE PAYMENT IS TO A CONCERN, THEN SUCH A PERSON SHOULD ALSO BE A MEMBER OR A PARTNER IN THE S AID CONCERN, HOLDING SUBSTANTIAL INTEREST IN THE CONCERN. IN CASE THE CONCERN IS A COMPANY, THEN HE MUST BE THE OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) CARRYING NOT L ESS THAN 20% OF THE VOTING POWER. IF THE CONCERN IS NOT A COMPANY, HE MUST AT ANY TIME DURING THE PREVIOUS YEAR, BE BENEFICIALLY ENTITLED TO NOT LESS THAN 20% OF THE INCOME OF SUCH CONCERN. 'SUCH SHAREHOLDER' IS THE SHAREHOLDER WHO IS A REGISTERED AND A BE NEFICIAL HOLDER OF SHARES HOLDING 10% VOTING POWER. THEREFORE, THE EXPANDED MEANING OF DIVIDEND AS ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 10 APPLIED TO PAYMENTS TO EVEN NON - SHAREHOLDER WOULD BE APPLICABLE IF ALL OF THE FOLLOWING CONDITIONS ARE FULFILLED : (A) THE PERSON IS A REGISTERED SHAREHOLDER OF THE COMPANY (B) THE PERSON IS BENEFICIALLY ENTITLED TO SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER OF THE COMPANY; (C) THE PERSON IS A MEMBER OR PARTNER IN OTHER CONCERN (D) THE PERSON HAS SUBSTANTIAL INTEREST IN THE CONCERN REFERRED TO IN CLAUSE (C) ABOVE. 20 . IN THE CASE OF DCIT VS. NATIONAL TRAVEL SERVICES 31 SOT 76 (DEL), THE TRIBUNAL HELD THAT WHERE A FIRM IS ONLY A BENEFICIAL OWN ER OF SHARES AND THE SHARES ARE REGISTERED IN THE NAMES OF THE PARTNERS, THE LOAN OBTAINED BY THE FIRM FROM THE COMPANY WHOSE SHARES TO THE EXTENT OF 48.18 PER CENT ARE HELD BY THE PARTNERS OF THE FIRM, CANNOT BE DEEMED AS DIVIDEND IN THE HANDS OF THE FIRM . IN CASE THE AMOUNT RECEIVED BY THE ASSESSEE IS TREATED AS LOAN AND ADVANCES GIVEN BY THE COMPANY, THIS DECISION IS SQUARELY APPLICABLE TO THE FACTS OF IMPUGNED CASE AND THE ASSESSEE COMPANY CANNOT BE LIABLE FOR DEEMED DIVIDEND. SIMILARLY, IN THE CASE OF RAJ KUMAR SINGH & CO. VS. DCIT 52 TTJ 221 (ALL), THE TRIBUNAL HELD THAT SEC. 2(22)(E) CAN BE INVOKED ONLY IN CASE OF REGISTERED SHAREHOLDER AND NOT A BENEFICIAL SHAREHOLDER . SHARES, THOUGH BELONGING TO THE FIRM BUT REGISTERED IN THE NAME OF PARTNERS, THE FIRM CANNOT BE MADE LIABLE UNDER S. 2(22)(E) IN RESPECT OF LOANS OBTAINED FROM THE COMPANY. 21 . WE HAVE GONE THROUGH THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF UNIVERSAL MEDICARE PVT. LTD 324 ITR 363 (MUMBAI). IN THIS CASE, HON BLE HIGH CO URT HAS HELD AS UNDER : - HOWEVER, EVEN ON THE SECOND ASPECT WHICH HAS WEIGHED WITH THE TRIBUNAL, WE ARE OF THE VIEW THAT THE CONSTRUCTION WHICH HAS BEEN PLACED ON THE PROVISIONS OF SECTION 2(22)(E) IS CORRECT. SECTION 2(22)(E) DEFINES THE AMBIT OF THE EX PRESSION DIVIDEND . ALL PAYMENTS BY WAY OF DIVIDEND HAVE TO BE TAXED IN THE HANDS OF THE RECIPIENT OF THE DIVIDEND NAMELY THE SHAREHOLDER. THE EFFECT OF SECTION 2(22) IS TO PROVIDE AN INCLUSIVE DEFINITION OF THE EXPRESSION DIVIDEND . CLAUSE (E) EXPANDS T HE NATURE OF PAYMENTS WHICH CAN BE CLASSIFIED AS A DIVIDEND. CLAUSE (E) OF SECTION 2(22) INCLUDES A PAYMENT MADE BY THE COMPANY IN WHICH THE PUBLIC ARE NOT SUBSTANTIALLY INTERESTED BY WAY OF AN ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 11 ADVANCE OR LOAN TO A SHAREHOLDER OR TO ANY CONCERN OF WHICH S UCH SHAREHOLDER IS A MEMBER OR PARTNER, SUBJECT TO THE FULFILLMENT OF THE REQUIREMENTS WHICH ARE SPELT OUT IN THE PROVISION. SIMILARLY, A PAYMENT MADE BY A COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER IS TREATED BY CLAUSE (E) TO BE INCLUDED IN THE EXPRESSION DIVIDEND . CONSEQUENTLY, THE EFFECT OF CLAUSE (E) OF SECTION 2(22) IS TO BROADEN THE AMBIT OF THE EXPRESSION DIVIDEND BY INCLUDING CERTAIN PAYMENTS MADE ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF A SHAREHOLDER. THE DEFINITION DOES NOT ALTER THE LEGAL POSITION THAT DIVIDEND HAS TO BE TAXED IN THE HANDS OF THE SHARE - HOLDER. CONSEQUENTLY IN THE PRESENT CASE THE PAYMENT, EVEN ASSUMING THAT IT WAS A DIVIDEND, WOULD HAVE TO BE TAXED NOT IN THE HANDS OF THE ASSESSEE BUT IN THE HANDS OF THE SHAREHOLDER. THE TRIBUNAL WAS, IN THE CIRCUMSTANCES, JUSTIFIED IN COMING TO THE CONCLUSION THAT, IN ANY EVENT, THE PAYMENT COULD NOT BE TAXED IN THE HANDS OF THE ASSESSEE. WE MAY IN CONCLUDING NOTE THAT THE BASIS ON WHICH THE ASSESSEE IS S OUGHT TO BE TAXED IN THE PRESENT CASE IN RESPECT OF THE AMOUNT OF RS. 32,00,000 IS THAT THERE WAS A DIVIDEND UNDER SECTION 2(22)(E) AND NO OTHER BASIS HAS BEEN SUGGESTED IN THE ORDER OF THE ASSESSING OFFICER. 22. THE DECISION OF THE JURISDICTIONAL HIG H COURT IS BINDING ON US. ON THIS BASIS ITSELF IN OUR OPINION THE PROVISIONS OF SECTION 2(22)(E) CANNOT BE APPLIED IN THE CASE OF THE ASSESSEE. SINCE THE LEARNED A.R VE HEMENTLY AGREED AND HAS EXHAUSTIVELY RELIED ON THE DECISION OF THE SPECIAL BENCH OF TH E TRIBUNAL IN THE CASE OF ACIT VS BHAUMIK COLOUR PVT. LTD 313 ITR 146 (MUM) TO SUPPORT THE ORDER OF THE CIT(A). WE HAVE GONE THROUGH THE SAID DECISION ALSO, WE NOTED THAT THE SPECIAL BENCH HAS ALSO TAKEN THE SAME VIEW THAT DEEMED DIVIDEND CANNOT BE ASSESS ED IN THE HANDS OF A PERSON WHO IS NOT A SHAREHOLDER OF THE COMPANY. EVEN THE SPECIAL BENCH HAS ALSO DISCUSSED IN CIRCULAR NO. 495 DATED 22.9.1987, 168 ITR (ST) 87. THE ASSESSING OFFICER HAS MADE THE ADDITION RELYING ON THIS CIRCULAR ALSO. IN THIS CASE PO SITION REFERRED TO THE SPECIAL BENCH WERE : 1. WHETHER DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE INCOME TAX ACT, 1961 CAN BE ASSESSED IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER WHO IS BOTH OF A PERSON OTHER THAN A SHAREHOLDER OF THE LENDE R ? 2. WHETHER THE WORDS SUCH SHAREHOLDER OCCURRING IN SECTION 2(22)(E) REFER TO A SHAREHOLDER WHO IS BOTH THE REGISTERED SHAREHOLDER AND THE BENEFICIAL SHAREHOLDER ? . 22.1 THE TRIBUNAL ANSWERED THE QUESTION IN THE FOLLOWING TERMS : - WE ARE O F THE VIEW THAT THE PROVISIONS OF SECTION 2(22)(E) DO NOT SPELL OUT AS TO WHETHER THE INCOME HAS TO BE TAXED IN THE HANDS OF THE SHAREHOLDER OR THE ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 12 CONCERN (NON - SHAREHOLDER). THE PROVISIONS ARE AMBIGUOUS. IT IS THEREFORE NECESSARY TO EXAMINE THE INTENTI ON BEHIND ENACTING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. 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 THOUGH THE COMPANY HAS ACCUMULATED PROFITS WOULD NOT DISTRIBUTE 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 DIVIDENDS, 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 DEEM ING PROVISIONS SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22)(E) IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDER. THE DEEMING PROVISIONS AS IT APPLIES TO THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST, IS BASED ON THE PRESUMPTION THAT THE LOAN OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. THE INTENTION OF THE LEGISLATURE IS THEREFORE TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF THE CONCERN. THE BASIS OF BRINGING IN THE AMENDMENT TO SECTION 2(22)(E) OF THE ACT BY THE FINANCE ACT, 1987, WITH EFFECT FROM APRIL 1, 1988, IS TO ENSURE THAT PERSONS WHO CONTROL THE AFFAIRS OF A COMPANY AS WELL AS THAT OF A FIRM CAN HAVE THE PAYMENT MADE TO A CONCERN FROM THE COMPANY AND THE PERSON WHO CAN CONTROL THE AFFAIRS OF THE CONCERN CAN DRAW THE SAME FROM THE CONCERN INSTEAD OF THE COM PANY 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 CONTEMPLATI NG A CHARGE TO TAX IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF A NON - SHAREHOLDER VIZ., CONCERN. A LOAN OR ADVANCE RECEIVED BY A CONCERN IS NOT IN THE NATURE OF INCOME. IN OTHER WORDS THERE IS A DEEMED ACCRUAL OF INCOME EVEN UNDER SECTION 5(1)(B ) IN THE HANDS OF THE SHAREHOLDER ONLY 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 ONL Y IN THE HANDS OF THE SHAREHOLDER AND NOT THE NON - SHAREHOLDER, VIZ., THE CONCERN. 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 T O ITS ORDINARY AND NATURAL MEANING TO INCLUDE EVEN A LOAN OR ADVANCE. ANY LOAN OR ADVANCE CANNOT BE DIVIDEND ACCORDING TO ITS ORDINARY AND NATURAL MEANING. THE ORDINARY AND NATURAL MEANING OF THE TERM DIVIDEND WOULD BE A SHARE IN PROFITS TO AN INVESTOR IN THE SHARE CAPITAL OF A LIMITED COMPANY. TO THE EXTENT THE MEANING OF THE WORD DIVIDEND IS EXTENDED TO LOANS AND ADVANCES TO A SHAREHOLDER OR TO A CONCERN IN WHICH A SHAREHOLDER IS ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 13 SUBSTANTIALLY INTERESTED DEEMING THEM AS DIVIDEND IN THE HANDS OF A SHAREH OLDER THE ORDINARY AND NATURAL MEANING OF THE WORD DIVIDEND IS ALTERED. TO THIS EXTENT THE DEFINITION OF THE TERM DIVIDEND CAN BE SAID TO OPERATE. IF THE DEFINITION OF DIVIDEND IS EXTENDED TO A LOAN OR ADVANCE TO A NON - SHAREHOLDER THE ORDINARY AND NA TURAL MEANING OF THE WORD DIVIDEND IS TAKEN AWAY. IN THE LIGHT OF THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22)(E) TO EXTEND THE LEGAL FICTION TO A CASE OF LOAN OR ADVANCE TO A NON - SHAREHOLDER CANNOT BE TAXED AS DEEMED DIVIDEND IN THE HANDS OF A NON - SHAREHOLDER. THE BASIC CHARACTERISTIC OF DIVIDEND AS HELD BY THE APEX COURT IN THE CASE OF KANTILAL MANILAL VS CIT [1961] 41 ITR 275 IS A SHARE OF PROFITS OF THE COMPANY GIVEN TO ITS SHAREHOLDERS. FURTHER, SECTION 206 OF THE COMPANIES ACT, 1956, PROHIB ITS PAYMENT OF DIVIDEND TO ANY PERSON OTHER THAN THE REGISTERED SHAREHOLDER. IF ONE WERE TO BREAK UP THE NATURAL MEANING THE FOLLOWING COMPONENTS EMERGE (A) DIVIDEND IS A SHARE OF PROFITS OF THE COMPANY (B) PAID TO ITS SHAREHOLDERS. SECTION 2(22) OF THE AC T ARTIFICIALLY EXTENDS THE SCOPE OF DIVIDEND FROM BEING 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 ALTER THE SECOND COMPONENT OF I TS 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 CASE OF CIT VS NALIN BEHARI LALL SINGHA [1969] 74 ITR 849 (SC) DESCRIBED THE SCOPE OF THE DEFINITION OF DIVIDEND THUS (PAGE 851 OF 74 ITR): THE DEFINITION IS, IT IS TRUE, AN INCLUSIVE DEFINITION AND A RECEIPT BY A S HAREHOLDER WHICH DOES NOT FALL WITHIN THE DEFINITION MAY POSSIBLY BE REGARDED AS DIVIDEND WITHIN THE MEANING OF THE ACT UNLESS THE CONTEXT NEGATIVES THAT VIEW . THE CONTENTION OF THE DEPARTMENTAL REPRESENTATIVE THAT THE PROVISIONS OF SECTION 8(A) OF THE ACT CREATE A FICTION BY WHICH EVEN PAYMENTS TO NON - SHAREHOLDERS CAN BE CONSTRUED AS DIVIDEND CANNOT BE ACCEPTED. THOSE PROVISIONS MERELY FIX THE YEAR IN WHICH DIVIDEND HAS TO BE TAXED. IT IS THEREFORE CLEAR THAT THE SHAREHOLDER ALONE CAN, IF AT ALL, BE SU BJECTED TO TAX FOR HAVING EARNED DIVIDEND. 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] 168 ITR (ST.) 87), WHICH STATES AS FOLLOWS (PAGE 91) : FURTHER, DEEMED DIVIDEND WOULD BE TAXED IN THE HANDS OF A CONCERN WHERE ALL THE FOLLOWING CONDITIONS ARE SATISFIED. ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 14 WE ARE OF THE VIEW THAT CIRCULAR OF THE CENTRAL BOARD OF DIRECT TAXES TO THE EXTENT 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. APART FROM THE ABOVE, IT IS ALSO NOTICED THAT SECTION 2(22)(E)(III) PROVIDES RELIEF TO A SHAREHOLDER AS FOLLOWS : DIVIDEND DOES NOT INCLUDE , - (III) ANY DIVI DEND PAID BY A COMPANY WHICH IS SET OFF BY IT AND TREATED AS A DIVIDEND WITHIN THE MEANING OF SUB - CLAUSE (E) TO THE 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 T AXED IN THE HANDS OF THE CONCERN THEN, THE BENEFIT OF SET OFF CANNOT BE ALLOWED TO THE CONCERN, BECAUSE THE CONCERN CAN NEVER DIVIDEND FROM THE COMPANY WHICH IS ONLY PAID TO THE SHAREHOLDER, 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 DEEM ED DIVIDEND UNDER SECTION 2(22)(E) OF THE INCOME - TAX ACT, 1961, CAN BE ASSESSED ONLY IN THE HANDS OF A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF ANY OTHER PERSON. IN THE LIGHT OF THE ABOVE DISCUSSION, THE QUESTIONS REFERRED TO THE SPECIAL BENCH ARE ANSWERED AS FOLLOWS: ON THE FIRST QUESTION: DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER. ON THE SECOND QUESTION: THE EXPRESS ION SHAREHOLDER REFERRED TO IN SECTION 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 SECTION 2(22)(E) WILL NOT APPLY. SIMILARLY IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE PROVISIONS OF SECTION 2(22)(E) WILL NOT APPLY. 2 3 . HON BLE RAJASTHAN HIGH COURT ALSO TAKEN THE SIMILAR VIEW IN THE CASE OF HILLTOP PALACE HOTELS P. LTD 313 ITR 116 (RAJ). HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS MCC MARKETING P. LTD, 343 ITR 350, HAS ALSO TAKEN THE SAME VIEW THAT WHERE THE ASSESSEE IS NOT A SHAREHOLDER OF COMPANY FOR WHICH HE RECEIVED A LOAN ON ADVANCE, THE LOAN ON ADVANCE CANNOT BE TREATED AS COVERED BY THE DEFINITION OF THE WORD ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 15 DIVIDEND AS CONTAINED IN SECTION 2(22)(E) OF THE I.T. ACT 1961 FOLLOWING THE DECISION OF DELHI HIGH COURT IN THE CASE OF CIT VS ANKITECH P. LTD 340 ITR 14 (DEL). WE HAVE ALSO GONE THROUGH THE DECISION OF CIT VS ANKI TECH P. LTD. IN THIS CASE WE NOTED, JACKSON GENERATOR P. LTD HAS GIVEN THE ADVANCE TO THE ASSESSEE COMPANY AND THE SHAREHOLDERS OF GJPL WERE HAVING SUBSTANTIAL INTEREST IN THE ASSESSEE COMPANY. WHEN THE MATTER TRAVELLED TO THE HON BLE HIGH COURT, HON BLE H IGH COURT APPROVING THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BHAUMIK COLOUR PVT. LTD, 313 ITR (80) 146 (MUM) TOOK THE VIEW THAT SINCE THE ASSESSEE IS NOT A SHAREHOLDER, LOAN ADVANCE GIVEN TO THE ASSESSEE IS NOT TREATED AS DEEMED DIVIDEN D U/S 2(22)(E). 2 4 . ON THIS BASIS ITSELF WE SET ASIDE THE ORDER OF THE CIT(A) AND DELETE THE ADDITION MADE BY THE ASSESSING OFFICER AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE AS THE ASSESSEE IS NOT THE SHAREHOLDER OF M/S VASANT LITHO & OFFSET PRINTI NG PVT LTD. . 2 5 . THE LEARNED A.R EXHAUSTIVELY ARGUED THAT THERE IS NO LOAN OR ADVANCE RECEIVED BY THE ASSESSEE FROM THE M/S VASANT LITHO & OFFSET PRINTING PVT LTD. AND THE AMOUNT RECEIVED WAS MERELY NORMAL BUSINESS TRANSACTION. NOW, WE WOULD LIKE TO DEAL WITH THE ARGUMENTS OF THE ASSESSEE ON THIS ASPECT. THE ASSESSE HAS EXPLAINED THE POSITION OF THE TRANSACTION WITH THE PVT LTD COMPANY. AS PER THE TRANSACTIONS SUMMARY, THE ASSESSEE MADE THE SALES OF INK FOR RS.3637285/ - TO THE P VT LTD COMPANY AND RECEIVE D THE PAYMENT OF RS.3946600/ - NOT THE PAYMENT OF RS.4240490/ - . THIS FACT HAS NOT BEEN DENIED BY THE DEPARTMENT. THE PVT LTD COMPANY WAS ALLOWED DEDUCTION IN RESPECT PURCHASES MADE FROM THE ASSESSE WHILE COMPUTING ITS TOTAL INCOME BY DEBITING IN ITS PROFI T AND LOSS ACCOUNT. THUS THE TRANSACTIONS ENTERED INTO BETWEEN THE ASSESSE AND THE PRIVATE LIMITED COMPANY ARE THE TRADING TRANSACTIONS AND I T IS A SETTLED LAW THAT TRADING ADVANCE CANNOT BE REGARDED TO BE LOANS AND ADVANCES FOR APPLYING THE PROVISION S OF SECTION 2(22)(E) OF THE INCOME TAX ACT. ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 16 2 6 . WE HAVE GONE THROUGH THE VARIOUS CASE LAW S AS RELIED BY THE LEARNED A.R AND THE ONE PLACED BEFORE US. THE VARIOUS CASE LAWS IN THIS REGARD ARE DISCUSSED AS UNDER : - A. PRADIP KUMAR MALHOTRA V. COMMISSIONER OF INCOME - TAX 338 ITR 538 (CAL). THE PHRASE 'BY WAY OF ADVANCE OR LOAN' APPEARING IN SUB - CLAUSE (E) OF SECTION 2(22) OF THE INCOME - TAX ACT, 1961, MUST BE CONSTRUED TO MEAN THOSE ADVANCES OR LOANS WHICH A SHAREHOLDER ENJOYS SIMPLY ON ACCOUNT OF BEING A PERSO N WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT. OF THE VOTING POWER ; BUT IF SUCH LOAN OR ADVANCE IS GIVEN TO SUCH SHAREHOLDER AS A CONSEQUENCE OF ANY FURTHER CONSIDERATION WHICH IS BENEFICIAL TO THE COMPANY RECEIVED FROM SUCH A SHARE - HOLDER, IN SUCH CASE, SUCH ADVANCE OR LOAN CANNOT BE SAID TO BE DEEMED DIVIDEND WITHIN THE MEANING OF THE ACT. THUS, GRATUITOUS LOAN OR ADVANCE GIVEN BY A COMPANY TO THOSE CLASSES OF SHAREHOLDERS WOULD COME WITHIN THE PURVIEW OF SECTION 2(22) BUT NOT CASES WHERE THE LOAN OR ADVANCE IS GIVEN IN RETURN TO AN ADVANTAGE CONFERRED UPON THE COMPANY BY SUCH SHAREHOLDER. B. SHYAMA CHARAN GUPTA V. COMMISSIONER OF INCOME - TAX 337 ITR 511 (ALL) THE ASSESSEE, THE MANAGING DIRECTOR OF A COMPANY, RECEIVED ADVANCES OF SALARY AND COMMISSION ON PROFITS. THE ASSESSING OFFICER TREATED THEM AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE INCOME - TAX ACT, 1961. THE TRIBUNAL HELD THAT THE ASSESSEE WAS NOT ENTITLED TO CLAIM RECEIPT OF ADVANCE AGAINST COMMISSION AND DIRECTED THE ASSESSING AUTHORITY TO RE - DETERMINE THE DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE AFTER ADJUSTING THE SALARY. ON APPEAL TO THE HIGH COUR T, IT WAS HELD DISMISSING THE APPEAL, THAT THE ADVANCE TOWARDS SALARY, WHICH WAS DUE TO THE ASSESSEE AND WAS CREDITED TO HIS ACCOUNT EVERY MONTH COULD NOT BE TREATED AS DEEMED DIVIDEND, BUT THE ADVANCE OF COMMISSION ON PROFITS OVER AND ABOVE THAT AMOUNT DRAWN DURING THE COURSE OF THE YEARS RELEVANT TO THE ASSESSMENT YEARS 1992 - 93 AND 1993 - 94 BEFORE THE PROFITS WERE DETERMINED AND ACCRUED TO HIM WOULD BE TREATED AS DEEMED DIVIDEND. THE AMOUNT WAS NOT TREATED AS A SEPARATE ADDITION IN THE HANDS OF THE ASSE SSEE. C. COMMISSIONER OF INCOME - TAX V. CREATIVE DYEING AND PRINTING P. LTD. 318 ITR 476 (DEL) THE ASSESSEE - COMPANY WAS ENGAGED IN THE BUSINESS OF DYEING AND PRINTING OF CLOTH AND WAS AN ANCILLARY UNIT OF P. BOTH THE ASSESSEE - COMPANY AND P HAD COMMON SHAREHOL DERS AND DIRECTORS, TWO OF WHOM ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 17 HELD MORE THAN 20 PER CENT. OF THE SHARES IN BOTH COMPANIES AND P HELD 50 PER CENT. OF THE SHARES IN THE ASSESSEE - COMPANY. P, IN ORDER TO INCREASE ITS EXPORT BUSINESS AND TO COMPETE WITH THE INTERNATIONAL STANDARDS IN GARMEN TS EXPORTS PROPOSED MODERNIZATION AND EXPANSION OF THE PLANT AND MACHINERY OF THE ASSESSEE - COMPANY. THE ASSESSEE - COMPANY BEING UNABLE TO INVEST SUCH A LARGE AMOUNT, P AGREED TO INVEST 50 PER CENT OF THE PROJECT COST, THE REST OF THE 50 PER CENT TO BE ARRA NGED BY THE SHAREHOLDERS/DIRECTORS OF THE COMPANY. THE FUNDS ADVANCED WERE TO BE ADJUSTED AGAINST THE DUES PAYABLE BY P TO THE ASSESSEE - COMPANY IN SUBSEQUENT YEARS FOR THE JOB WORK OF PRINTING AND DYEING TO BE DONE BY THE ASSESSEE FOR P. THE ASSESSING OFFI CER HELD THAT THE AMOUNT PAID TO THE ASSESSEE - COMPANY WAS A DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE INCOME - TAX ACT, 1961. THE TRIBUNAL HELD THAT IT WAS AN ADVANCE FOR A COMMERCIAL PURPOSE TO THE ASSESSEE - COMPANY BY ITS SISTER CONCERN P AND NOT A DEEM ED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. ON APPEAL IT WAS HELD DISMISSING THE APPEAL, THAT THE AMOUNTS ADVANCED FOR BUSINESS TRANSACTION BETWEEN THE ASSESSEE - COMPANY AND P DID NOT FALL WITHIN THE DEFINITION OF DEEMED DIVIDEND UNDER SECTION 2(22)(E) . D. COMMISSIONER OF INCOME - TAX V. RAJ KUMAR 318 ITR 462 (DEL) SECTION 2(22)(E) OF THE INCOME - TAX ACT, 1961, SHOWS THAT A PAYMENT WOULD ACQUIRE THE ATTRIBUTES OF A DIVIDEND WITHIN THE MEANING OF THE PROVISION IF THE FOLLOWING CONDITIONS ARE FULFILLED: (I) TH E COMPANY MAKING THE PAYMENT IS ONE IN WHICH THE PUBLIC ARE NOT SUBSTANTIALLY INTERESTED ; (II) MONEY SHOULD BE PAID BY THE COMPANY TO A SHAREHOLDER HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER OF THE COMPANY. IT WOULD MAKE NO DIFFERENCE IF THE PAYMENT WAS OUT OF THE ASSETS OF THE COMPANY OR OTHERWISE; (III) THE MONEY SHOULD BE PAID EITHER BY WAY OF AN ADVANCE OR LOAN OR IT MAY BE 'ANY PAYMENT' WHICH THE COMPANY MAY MAKE ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF ANY SHAREHOLDER OR ALSO TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE IS SUBSTANTIALLY INTERESTED; AND (IV) THE LIMITING FACTOR BEING THAT THESE PAYMENTS MUST BE TO THE EXTENT OF ACCUMULATED PROFITS, POSSESSED BY SUCH A COMPANY. THE IMMEDIATE PRECURS OR TO SECTION 2(22)(E) IS FOUND IN SECTION 2(6A) OF THE INDIAN INCOME - TAX ACT, 1922. THE PURPOSE OF INSERTION OF SUB - CLAUSE (E) TO SECTION 2(6A) IN THE 1922 ACT WAS TO BRING WITHIN THE TAX NET MONIES PAID BY CLOSELY HELD COMPANIES TO THEIR PRINCIPAL SHAREH OLDERS IN THE GUISE OF LOANS AND ADVANCES TO AVOID PAYMENT OF TAX. THEREFORE, SUB - CLAUSE (E) OF SECTION 2(22) OF THE 1961 ACT, WHICH IS IN PARI MATERIA WITH SUB - CLAUSE (E) OF SECTION 2(6A) OF THE 1922 ACT, PLAINLY SEEKS TO BRING WITHIN THE TAX NET, ACCUMUL ATED PROFITS WHICH ARE DISTRIBUTED BY CLOSELY HELD COMPANIES TO ITS SHAREHOLDERS IN THE FORM OF LOANS. THE PURPOSE BEING THAT PERSONS WHO MANAGE SUCH CLOSELY HELD COMPANIES SHOULD NOT ARRANGE THEIR AFFAIRS IN A MANNER THAT THEY ASSIST THE SHAREHOLDERS IN A VOIDING THE PAYMENT OF TAXES BY HAVING THESE COMPANIES PAY OR DISTRIBUTE, WHAT WOULD LEGITIMATELY BE DIVIDEND IN THE HANDS OF THE ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 18 SHAREHOLDERS' MONEY IN THE FORM OF AN ADVANCE OR LOAN. THE WORD 'ADVANCE' HAS TO BE READ IN CONJUNCTION WITH THE WORD 'LOAN'. USUALLY ATTRIBUTES OF A LOAN ARE THAT IT INVOLVES THE POSITIVE ACT OF LENDING COUPLED WITH ACCEPTANCE BY THE OTHER SIDE OF THE MONEY AS LOAN : IT GENERALLY CARRIES INTEREST AND THERE IS AN OBLIGATION OF REPAYMENT. ON THE OTHER HAND, IN ITS WIDEST MEANING T HE TERM 'ADVANCE' MAY OR MAY NOT INCLUDE LENDING. THE WORD 'ADVANCE' IF NOT FOUND IN THE COMPANY OF OR IN CONJUNCTION WITH A WORD 'LOAN' MAY OR MAY NOT INCLUDE THE OBLIGATION OF REPAYMENT. IF IT DOES, THEN IT WOULD BE A LOAN. THUS, ARISES THE CONUNDRUM AS TO WHAT MEANING ONE WOULD ATTRIBUTE TO THE TERM 'ADVANCE'. THE RULE OF CONSTRUCTION WHICH ANSWERS THIS CONUNDRUM IS NOSCITUR A SOCIIS. THE RULE HAS BEEN EXPLAINED BOTH BY THE PRIVY COUNCIL IN THE CASE OF ANGUS ROBERTSON V. GEORGE DAY [1879] 5 AC 63 BY OBS ERVING 'IT IS LEGITIMATE RULE OF CONSTRUCTION TO CONSTRUE WORDS IN AN ACT OF PARLIAMENT WITH REFERENCE TO WORDS FOUND IN IMMEDIATE CONNECTION WITH THEM' AND THE SUPREME COURT IN THE CASE OF ROHIT PULP AND PAPER MILLS LTD. V. COLLECTOR OF CENTRAL EXCISE, A IR 1991 SC 754 AND STATE OF BOMBAY V. HOSPITAL MAZDOOR SABHA, AIR 1960 SC 610. THE PRINCIPLES WITH REGARD TO THE APPLICABILITY OF THE RULE OF CONSTRUCTION ARE BRIEFLY AS FOLLOWS : (I) DOES THE TERM IN ISSUE HAVE MORE THAN ONE MEANING ATTRIBUTED TO IT, I.E ., BASED ON THE SETTING OR THE CONTEXT ONE COULD APPLY THE NARROWER OR WIDER MEANING ; (II) ARE THE WORDS OR TERMS USED FOUND IN A GROUP TOTALLY 'DISSIMILAR' OR IS THERE A 'COMMON THREAD' RUNNING THROUGH THEM ; (III) THE PURPOSE BEHIND INSERTING OF THE TER M. IN THE INSTANT CASE (I) THE TERM 'ADVANCE' HAS UNDOUBTEDLY MORE THAN ONE MEANING DEPENDING ON THE CONTEXT IN WHICH IT IS USED; (II) BOTH THE TERMS, THAT IS, 'ADVANCE' OR 'LOAN' ARE RELATED TO THE ACCUMULATED PROFITS OF THE COMPANY; AND (III) THE PURPOSE BEHIND THE INSERTION OF THE TERM 'ADVANCE' WAS TO BRING WITHIN THE TAX NET PAYMENTS MADE IN THE GUISE OF LOAN TO SHAREHOLDERS BY COMPANIES IN WHICH THEY HAVE A SUBSTANTIAL INTEREST SO AS TO AVOID PAYMENT OF TAX BY THE SHAREHOLDERS. THE WORD 'ADVANCE' WHIC H APPEARS IN THE COMPANY OF THE WORD 'LOAN' COULD ONLY MEAN SUCH ADVANCE WHICH CARRIES WITH IT AN OBLIGATION OF REPAYMENT. TRADE ADVANCES WHICH ARE IN THE NATURE OF MONEY TRANSACTED TO GIVE EFFECT TO A COMMERCIAL TRANSACTION WOULD NOT FALL WITHIN THE AMBIT OF THE PROVISION OF SECTION 2(22)(E) OF THE ACT. E. COMMISSIONER OF INCOME - TAX V. AMBASSADOR TRAVELS P. LTD. 318 ITR 376 (DEL) THE ASSESSEE WAS ENGAGED IN THE TRAVEL AGENCY BUSINESS. IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1998 - 99, THE ASSESSE E ENTERED INTO BUSINESS TRANSACTIONS WITH TWO COMPANIES AND HAD FINANCIAL TRANSACTIONS WITH THEM. THE ASSESSING OFFICER ON THE BASIS OF THE SHAREHOLDING PATTERN CONCLUDED THAT THE FINANCIAL TRANSACTIONS WOULD FALL IN THE CATEGORY OF DEEMED DIVIDEND. THE C OMMISSIONER OF INCOME - TAX (APPEALS) CONFIRMED THE ORDER PASSED BY THE ASSESSING OFFICER. THE ITA NO.22/NAG/2010 M/S. VASANT FINE ART LITHO WORKS, GONDIA 19 TRIBUNAL HELD THAT THE TRANSACTIONS DID NOT REPRESENT LOANS OR ADVANCES WITHIN THE MEANING OF THE PROVISIONS OF SECTION 2(22)(E) OF THE INCOME - TAX ACT, 1961. ON AP PEAL IT WAS HELD DISMISSING THE APPEAL, THAT THE ASSESSEE WAS INVOLVED IN THE BOOKING OF RESORTS FOR THE CUSTOMERS OF THESE COMPANIES AND ENTERED INTO NORMAL BUSINESS TRANSACTIONS AS A PART OF ITS DAY - TO - DAY BUSINESS ACTIVITIES. THE FINANCIAL TRANSACTIONS IN ANY CIRCUMSTANCES COULD NOT BE TREATED AS LOANS OR ADVANCES. HENCE, SECTION 2(22)(E) WAS NOT APPLICABLE. 2 7 . IN VIEW OF THE AFORESAID CASE LAWS AND THE DISCUSSION HELD BY US IN THE PRECEDING PARAGRAPH THAT WHATEVER ADVANCE IF ANY GIVEN TO THE ASSE SSEE BY PVT. LTD, IT CANNOT BE REGARDED TO BE THE LOANS AND ADVANCES IN TERMS OF SECTION 2 (22)(E) OF THE INCOME TAX ACT. IT CAN THEREFORE NOT BE HELD TO BE DEEMED DIVIDEND. WE ACCORDINGLY ON MERIT ALSO CONFIRM THE ORDER OF THE CIT(A). 2 8 . IN THE RESUL T , THE APPEAL FILED BY THE REVENUE STAND S DISMISSED. PRONOUNCED IN THE OPEN COURT ON 17.10 .20 1 2 SD/ - SD/ - ( D.T. GARASIA ) (P.K. BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER VG/SPS NAGPUR DATED 17 TH OCTOBER , 20 1 2 COPY TO 1 DCIT, CIRCLE - 8, NAGPUR 2 M/S. VASANT FINE ART LITHO WORKS, RAILTOLY, GONDIA 3 CIT - IV, NAGPUR 4 THE CIT (A) , NAGPUR 5 THE DR, ITAT, NAGPUR 6 GUARD FILE. BY ORDER SR. PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL NAGPUR