THE DCIT, Vijayawada V. M/s Conzug Logistics Pvt, Ltd., Visakhapatnam

ITA 226/VIZ/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 8857 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-06-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 11-04-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 02-06-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R GOVINDARAJAN
• Keywords: Question of law; Deemed dividend
• Section: 143(3); 153A; 132

Judgement Text

ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . . , BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER ./I.T.A.NO.226/VIZAG/2015 ( / ASSESSMENT YEAR: 2009-10) THE DCIT, CENTRAL CIRCLE - 2, VIJAYAWADA M/S. CONZUG LOGSITICS PVT. LTD., VISAHAPATNAM [PAN NO. AACCC2833J ] ( / APPELLANT) ( / RESPONDENT) / APPELLANT BY : SHRI R. GOVINDA RAJAN, DR / RESPONDENT BY : SHRI G.V.N. HARI, AR / DATE OF HEARING : 01.06.2017 / DATE OF PRONOUNCEMENT : 21.06.2017 / O R D E R PER D.S. SUNDER SINGH, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE REVENUE AGAINST ORDER OF THE CIT(A)- 3(I/C), VISAKHAPATNAM, CAMP: HYDERABAD IN ITA NO.48 6/2013- 14/CIT(A)-3/VIZAG/2014-15 DATED 31.3.2015 FOR THE A .Y. 2009-10. 2. ALL THE GROUNDS OF APPEAL ARE RELATED TO THE ADD ITION OF RS.35 LAKHS TOWARDS DEEMED DIVIDEND U/S 2(22)(E) OF THE INCOME TAX ACT, 1961 (HEREINAFTER CALLED AS THE ACT). THE ASSESSEE CO MPANY ENGAGED IN THE BUSINESS ACTIVITY OF HANDLING AND TRANSPORT CONTRAC TORS AT VISAKHAPATNAM ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 2 AND CONSIGNMENT AGENT AT R.I.N.L., NAGPUR. THE ASS ESSEE FILED ORIGINAL RETURN OF INCOME ON 27.9.2009 DECLARING LOSS OF RS. 34,014/-. A SEARCH U/S 132 OF THE ACT WAS CONDUCTED IN THE GROUP OF CA SES OF M/S. MAHA MARUTHI LOGISTICS PRIVATE LIMITED ON 4.2.2010 AND N OTICE U/S 153A OF THE ACT WAS ISSUED TO THE ASSESSEE AND THE ASSESSMENT W AS COMPLETED U/S 143(3) R.W.S. 153A OF THE ACT. DURING THE ASSESSME NT PROCEEDINGS, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE COMPANY I S A CLOSELY HELD COMPANY WITH AUTHORIZED CAPITAL OF RS.1,50,000/- WI TH TWO MAJOR SHAREHOLDERS AS UNDER: SRI A. KRISHNA CHAITANYA 50% 7500 SHARES SMT. V. RADHA MADHAVI 50% 7500 SHARES 2.1 SRI A. KRISHNA CHAITANYA IS ONE OF THE MAJOR SH ARE HOLDER OF M/S. MAHA MARUTHI LOGISTICS PRIVATE LIMITED WITH 23 % OF SHARES AND M/S. MAHA MARUTHI LOGISTICS PRIVATE LIMITED IS A CL OSELY HELD COMPANY IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED. FOR THE ASSESSMENT YEAR 2009-10, THE COMPANY IS HAVING ACCUMULATED PROFITS TO THE EXTENT OF RS. 4,82,35,110/-. M/S. MAHA MARUTHI LOGISTICS PRIVATE LIMITED PAID AN AMOUNT OF RS.45 LAKHS ON 7.10.2009 THROUGH RTGS TO THE ASSESSEE. AS ON 1.4.2008, AN AMOUNT OF RS.2,16,307/- WAS RECEIVA BLE FROM M/S. MAHA MARUTHI LOGISTICS PRIVATE LIMITED AND WITH THE PAYM ENT OF RS.45 LAKHS, THE NET BALANCE RECEIVED BY THE ASSESSEE COMPANY WA S RS.42,82,693/-. ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 3 SINCE THE SHAREHOLDERS OF THE ASSESSEE COMPANY ARE HAVING SUBSTANTIAL SHARE HOLDING EXCEEDING 20% IN M/S. MAHA MARUTHI LO GISTICS PRIVATE LIMITED, THE ASSESSING OFFICER HELD THAT THE PAYMEN T MADE TO ASSESSEE COMPANY AS A DEEMED DIVIDEND WITHIN THE MEANING OF SECTION 2(22)(E) OF THE ACT AND BROUGHT TO TAX. 2.2 AGGRIEVED BY THE ORDER OF THE ASSESSING O FFICER, THE ASSESSEE WENT ON APPEAL BEFORE THE CIT(A). THE LD. CIT(A) H ELD IN PARA NO.4.3 OF THE LD.CIT(A)S ORDER THAT THERE WAS NO WARRANT IN THE CASE OF THE ASSESSEE COMPANY, THEREFORE, NOTICE ISSUED U/S 153A OF THE ACT WAS INVALID. IN PARA NO.5.3, THE LD. CIT(A) DELETED TH E ADDITION ON MERITS HOLDING THAT THE ASSESSEE COMPANY IS NOT A REGISTER ED SHARE HOLDER OF M/S. MAHA MARUTHI LOGISTICS PRIVATE LIMITED AND THE DEEMED DIVIDEND CANNOT BE ASSESSED IN THE HANDS OF THE DEEMED SHARE HOLDER. AGGRIEVED BY THE ORDER OF THE LD.CIT(A) THE REVENUE IS IN APP EAL BEFORE US. 3.0 APPEARING FOR THE REVENUE, THE LD. D.R. ARG UED THAT THE DIRECTORS OF THE COMPANY ARE HAVING SUBSTANTIAL INTEREST IN M /S. MAHA MARUTHI LOGISTICS PRIVATE LIMITED, WHICH HAS PAID THE MONEY TO THE ASSESSEE COMPANY AND WAS HAVING ACCUMULATED PROFITS TO THE E XTENT OF RS. 4.82 CRORES. SRI KRISHNA CHAITANYA IS HAVING 23% OF SH AREHOLDING IN M/S. MAHA MARUTHI LOGISTICS PRIVATE LIMITED AND 50% SHAR EHOLDING IN THE ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 4 ASSESSEE COMPANY AND IN BOTH THE COMPANIES, PUBLIC ARE NOT SUBSTANTIALLY INTERESTED AND THE PAYMENT MADE TO TH E ASSESSEE COMPANY REQUIRED TO BE BROUGHT TO TAX AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE COMPANY WITHIN THE MEANING OF SECTION 2(22 )(E) OF INCOME TAX ACT. ACCORDINGLY, SUPPORTED THE ORDER OF THE LD. C IT(A). THE LD. D.R. HAS FURTHER ARGUED THAT THE LD. CIT(A) HAS WRONGLY QUASHED THE NOTICE ISSUED U/S 153A OF THE ACT STATING THAT THERE WAS N O WARRANT ISSUED IN THE NAME OF THE ASSESSEE COMPANY AND HE PRODUCED TH E COPY OF THE WARRANT ISSUED U/S 132 OF THE ACT IN THE NAME OF TH E ASSESSEE COMPANY. ON THE OTHER HAND, THE LD. A.R. RELIED ON THE ORDER S OF THE CIT(A). 4. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATER IALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE LD. CIT(A) QUASHED THE NOTICE ISSUED U/S 153A OF THE AC T STATING THAT THERE WAS NO WARRANT EXECUTED IN THE NAME OF THE ASSESSEE . THE LD. D.R. PLACED THE COPY OF THE WARRANT EXECUTED AGAINST THE ASSESSEE AND THE LD. A.R. HAS NOT DISPUTED THE SUBMISSIONS MADE BY T HE ASSESSING OFFICER. HENCE, WE SET ASIDE THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND HOLD THAT THE NOTICE ISSUED U/S 153A OF THE ACT IS VALID AND ACCORDINGLY, ASSESSMENT WAS MADE VALIDLY U/S 143(3) R.W.S. 153A OF THE ACT . 5. THE ASSESSEE IS A PRIVATE LIMITED COMPANY IN WHI CH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED. M/S. MAHA MARUTHI LOGIST ICS PRIVATE LIMITED HAS ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 5 GIVEN A LOAN OF RS.45 LAKHS TO THE ASSESSEE COMPANY . THE ASSESSING OFFICER TREATED THE AMOUNT OF LOAN GIVEN TO THE ASS ESSEE COMPANY AS A DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. THE ASSES SEE COMPANY IS NOT A SHAREHOLDER IN THE M/S. MAHA MARUTHI LOGISTICS PR IVATE LIMITED. THE DIRECTORS OF THE ASSESSEE COMPANY ARE HAVING SUBSTA NTIAL SHARE IN M/S. MAHA MARUTHI LOGISTICS PRIVATE LIMITED, WHICH HAS G IVEN A LOAN TO THE ASSESSEE COMPANY. NOW THE ISSUE FOR CONSIDERATION BEFORE US IS WHETHER THE PAYMENT MADE TO ASSESSEE COMPANY WHICH IS NOT A SHAREHOLDER IN THE PAYER COMPANY IS DEEMED DIVIDEND OR NOT. WE HAVE GONE THROUGH THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT CAREFULLY AND EXTRACT THE RELEVANT PROVISIONS OF SECTION 2(22)(E) OF THE ACT, WHICH READS AS UNDER: ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WH ETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) [MA DE AFTER THE 31ST DAY OF MAY, 1987 , BY WAY OF ADVANCE OR LOAN TO A SHARE HOLDER, BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT B EING 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, 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 CL AUSE REFERRED TO AS THE SAID CONCERN)] OR ANY PAYMENT BY ANY SUCH COMPANY O N BEHALF, OR FOR- THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFIT S 5. FROM THE PLAIN READING OF SECTION 2(22)(E) OF TH E ACT, IT IS EVIDENT THAT THE DEEMED DIVIDEND IS TAXABLE IN THE HANDS OF THE REGISTERED SHARE HOLDER BUT NOT IN THE HANDS OF THE DEEMED SHAREHOLD ERS. ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 6 6. THE SAME ISSUE HAS COME UP FOR ADJUDICATION BEFO RE THE HONBLE ITAT B BENCH, HYDERABAD IN ITA NOS.1495 TO 1500/H /2014 IN THE CASE OF G. INDIRA KRISHNA REDDY AND G.V. KRISHNA REDDY A ND THE COORDINATE BENCH OF ITAT HELD THAT THE DEEMED DIVIDEND IS TAXA BLE IN THE HANDS OF THE REGISTERED SHAREHOLDERS BUT NOT IN THE HANDS OF THE DEEMED SHAREHOLDERS. THE RELEVANT PART OF ORDER OF THE IT AT, HYDERABAD IS REPRODUCED AS UNDER: 11.1 THE HON'BLE DELHI HIGH COURT IN CASE OF CIT VS . ANKITECH P. LTD. (SUPRA) WHILE CONSIDERING IDENTICAL ISSUE APPROVED THE DECI SION OF THE ITAT, MUMBAI SPECIAL BENCH IN CASE OF BHAUMIC COLOURS (P) LTD., 313 ITR (AT) 146 AND HELD AS UNDER: '22. INSOFAR AS THE PROVISIONS OF SECTION 2(22)(E) ARE CONCERNED, WE HAVE ALREADY EXTRACTED THIS PROVISION AND TAKEN NOTE OF THE CONDITIONS/REQUISITES WHICH ARE TO BE ESTABLISHED FOR MAKING PROVISION AP PLICABLE. IN COMMISSIONER OF INCOME TAX VS. C.P. SARATHY MUDALIA R[1972] 83 ITR 170, THE SUPREME COURT HAD TRACED OUT THE ASSESSEE OF TH IS PROVISION IN THE FOLLOWING MANNER: ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WH ICH THE PUBLIC ARE SUBSTANTIALLY INTEREST, OF ANY SUM (WHETHER AS REPR ESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MADE AFTER 31.0 5.19987 BY WAY OF ADVANCE OR LOAN. FIRST LIMB A) TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENE FICIAL OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS T HAN TEN PERCENT OF THE VOTING POWER, SECOND LIMB B) OR TO MY CONCERN IN WHICH, SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFT ER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN) THIRD LIMB C) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OR ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS. 23. IT IS RIGHTLY POINTED OUT BY THE BOMBAY HIGH CO URT IN UNIVERSAL MEDICARE (P) LTD.(SUPRA)THAT SECTION 2(22)(E) OF TH E ACT IS NOT ARTISTICALLY WORDED. BE AS IT MAY, WE MAY REITERATE THAT AS PER THIS PROVISION, THE FOLLOWING CONDITIONS ARE TO BE SATISFIED: (1) THE PAYER COMPANY MUST BE A CLOSELY HELD COMPAN Y. ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 7 (2) IT APPLIES TO ANY SUM PAID BY WAY OF LOAN OR AD VANCE DURING THE YEAR TO THE FOLLOWING PERSONS: (A) A SHAREHOLDER HOLDING AT LEAST 10 OF VOTING POW ER IN THE PAYER COMPANY. (B) A COMPANY IN WHICH SUCH SHAREHOLDER HAS AT LEAS T 20% OF THE VOTING POWER. (C) A CONCERN (OTHER THAN COMPANY) IN WHICH SUCH SH AREHOLDER HAS AT LEAST 20% INTEREST. (3) THE PAYER COMPANY HAS ACCUMULATED PROFITS ON TH E DATE OF ANY SUCH PAYMENT AND THE PAYMENT IS OUT OF ACCUMULATED PROFI TS. (4) THE PAYMENT OF LOAN OR ADVANCE IS NOT IN COURSE OF ORDINARY BUSINESS ACTIVITIES. 24. THE INTENTION BEHIND ENACTING PROVISIONS OF SEC TION 2(22)(E) IS THAT CLOSELY HELD COMPANIES (I.E. COMPANIES IN WHICH PUB LIC ARE NOT SUBSTANTIALLY INTERESTED), WHICH ARE CONTROLLED BY A GROUP OF MEMBERS, EVEN THOUGH THE COMPANY HAS ACCUMULATED PROFITS WOULD NO T DISTRIBUTE SUCH PROFIT AS M/S. ACE TYRES LIMITED, BACHUPALLY, RANGA REDDY DISTRICT DIVIDEND BECAUSE IF SO DISTRIBUTED THE DIVIDEND INC OME WOULD BECOME TAXABLE IN THE HANDS OF THE SHAREHOLDERS. INSTEAD O F DISTRIBUTING ACCUMULATED PROFITS AS DIVIDEND, COMPANIES DISTRIBU TE THEM AS LOAN OR ADVANCES TO SHAREHOLDERS OR TO CONCERN IN WHICH SUC H SHAREHOLDERS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER. IN SUCH AN EVENT, BY T HE DEEMING PROVISIONS, SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDERS. THE DEEMING PROVISIONS AS IT APPLI ES TO THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST, IS BASED ON THE PRESUMPTION T HAT THE LOANS OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. 25. FURTHER, IT IS AN ADMITTED CASE THAT UNDER NORM AL CIRCUMSTANCES, SUCH A LOAN OR ADVANCE GIVEN TO THE SHAREHOLDERS OR TO A C ONCERN, WOULD NOT QUALIFY AS DIVIDEND. IT HAS BEEN MADE SO BY LEGAL F ICTION CREATED UNDER SECTION 2(22)(E) OF THE ACT. WE HAVE TO KEEP IN MIN D THAT THIS LEGAL PROVISION RELATES TO 'DIVIDEND'. THUS, BY A DEEMING PROVISION, IT IS THE DEFINITION OF DIVIDEND WHICH IS ENLARGED. LEGAL FIC TION DOES NOT EXTEND TO 'SHAREHOLDER'. WHEN WE KEEP IN MIND THIS ASPECT, TH E CONCLUSION WOULD BE OBVIOUS, VIZ., LOAN OR ADVANCE GIVEN UNDER THE COND ITIONS SPECIFIED UNDER SECTION 2(22)(E) OF THE ACT WOULD ALSO BE TREATED A S DIVIDEND. THE FICTION HAS TO STOP HERE AND IS NOT TO BE EXTENDED FURTHER FOR BROADENING THE CONCEPT OF SHAREHOLDERS BY WAY OF LEGAL FICTION. IT IS A COMMON CASE THAT ANY COMPANY IS SUPPOSED TO DISTRIBUTE THE PROFITS I N THE FORM OF DIVIDEND TO ITS SHAREHOLDERS/MEMBERS AND SUCH DIVIDEND CANNOT B E GIVEN TO NON- MEMBERS. THE SECOND CATEGORY SPECIFIED UNDER SECTIO N 2(22)(E) OF THE ACT, VIZ., A CONCERN (LIKE THE ASSESSEE HEREIN), WHICH I S GIVEN THE LOAN OR ADVANCE IS ADMITTEDLY NOT A SHAREHOLDER/MEMBER OF T HE PAYER COMPANY. THEREFORE, UNDER NO CIRCUMSTANCE, IT COULD BE TREAT ED AS SHAREHOLDER/MEMBER RECEIVING DIVIDEND. IF THE INTEN TION OF THE LEGISLATURE WAS TO TAX SUCH LOAN OR ADVANCE AS DEEMED DIVIDEND AT THE HANDS OF 'DEEMING SHAREHOLDER', THEN THE LEGISLATURE WOULD H AVE INSERTED DEEMING PROVISION IN RESPECT OF SHAREHOLDER AS WELL, THAT H AS NOT HAPPENED. MOST OF ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 8 THE ARGUMENTS OF THE LEARNED COUNSELS FOR THE REVEN UE WOULD STAND ANSWERED, ONCE WE LOOK INTO THE MATTER FROM THIS PE RSPECTIVE. 26. IN A CASE LIKE THIS, THE RECIPIENT WOULD BE A S HAREHOLDER BY WAY OF DEEMING PROVISION. IT IS NOT CORRECT ON THE PART OF THE REVENUE TO ARGUE THAT IF THIS POSITION IS TAKEN, THEN THE INCOME 'IS NOT TAXED AT THE HANDS OF THE RECIPIENT'. SUCH AN ARGUMENT BASED ON THE SCHE ME OF THE ACT AS PROJECTED BY THE LEARNED COUNSELS FOR THE REVENUE O N THE BASIS OF SECTIONS 4, 5, 8, 14 AND 56 OF THE ACT WOULD BE OF NO AVAIL. SIMPLE ANSWER TO THIS ARGUMENT IS THAT SUCH LOAN OR ADVANCE, IN THE FIRST PLACE, IS NOT AN INCOME. SUCH A LOAN OR ADVANCE HAS TO BE RETURNED BY THE RE CIPIENT TO THE COMPANY, WHICH HAS GIVEN THE LOAN OR ADVANCE. 27. PRECISELY, FOR THIS VERY REASON, THE COURTS HAV E HELD THAT IF THE AMOUNTS ADVANCED ARE FOR BUSINESS TRANSACTIONS BETWEEN THE PARTIES, SUCH PAYMENT WOULD NOT FALL WITHIN THE DEEMING DIVIDEND UNDER SE CTION 2(22)(E) OF THE ACT. 28. INSOFAR AS RELIANCE UPON CIRCULAR NO. 495 DATED 22.09.1997 ISSUED BY CENTRAL BOARD OF DIRECT TAXES IS CONCERNED, WE ARE INCLINED TO AGREE WITH THE OBSERVATIONS OF THE MUMBAI BENCH DECISION IN BH AUMIK COLOUR (P) LTD. (SUPRA)THAT SUCH OBSERVATIONS ARE NOT BINDING ON TH E COURTS. ONCE IT IS FOUND THAT SUCH LOAN OR ADVANCE CANNOT BE TREATED A S DEEMED DIVIDEND AT THE HANDS OF SUCH A CONCERN WHICH IS NOT A SHAREHOL DER, AND THAT ACCORDING TO US IS THE CORRECT LEGAL POSITION, SUCH A CIRCULA R WOULD BE OF NO AVAIL. 29. NO DOUBT, THE LEGAL FICTION/DEEMED PROVISION CR EATED BY THE LEGISLATURE HAS TO BE TAKEN TO 'MAGIGICAL CONCLUSION' AS HELD I N ANDALEEB SEHGAL (SUPRA). THE REVENUE WANTS THE DEEMING PROVISION TO BE EXTENDED WHICH IS ILLOGICAL AND ATTEMPT IS TO CREATE A REAL LEGAL FIC TION, WHICH IS NOT CREATED BY THE LEGISLATURE. WE SAY AT THE COST OF REPETITION T HAT THE DEFINITION OF SHAREHOLDER IS NOT ENLARGED BY ANY FICTION. 30. BEFORE WE PART WITH, SOME COMMENTS ARE TO BE NE CESSARILY MADE BY US. AS POINTED OUT ABOVE, IT IS NOT IN DISPUTE THAT THE CONDITIONS STIPULATED IN SECTION 2(22)(E) OF THE ACT TREATING THE LOAN AND A DVANCE AS DEEMED DIVIDEND ARE ESTABLISHED IN THESE CASES. THEREFORE, IT WOULD ALWAYS BE OPEN TO THE REVENUE TO TAKE CORRECTIVE MEASURE BY T REATING THIS DIVIDEND INCOME AT THE HANDS OF THE SHAREHOLDERS AND TAX THE M ACCORDINGLY. AS OTHERWISE, IT WOULD AMOUNT TO ESCAPEMENT OF INCOME AT THE HANDS OF THOSE SHAREHOLDERS.' 11.2 THE SAME VIEW HAS ALSO BEEN EXPRESSED BY THE H ON'BLE DELHI HIGH COURT AGAIN IN CASE OF CIT VS. NAVYUG PROMOTERS P. LTD. ( 203 TAXMAN 618) AND HON'BLE BOMBAY HIGH COURT IN CASE OF CIT VS. UNIVER SAL MEDICARE (P) LTD., (324 ITR 263). 11.3 THE IT AT, HYDERABAD BENCH IN CASE OF MARC MA NUFACTURERS PVT. LTD. VS. ACIT IN ITA NO. 555/HYD/2008 DT. 31/08/2009 WHI LE CONSIDERING IDENTICAL ISSUE OF ADVANCEMENT OF LOAN TO ONE COMPANY, WHICH IS NOT A SHAREHOLDER OF THE LENDER COMPANY FOLLOWING THE DECISION OFM/S. ACE TY RES LIMITED, BACHUPALLY, ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 9 RANGA REDDY DISTRICL ITAT MUMBAI SPECIAL BENCH IN C ASE OF BHAUMIK COLOUR P. LTD. (SUPRA) AND OTHER DECISIONS HELD AS UNDER: '5. IT CAN BE SEEN FROM THE CIRCULAR THAT THE PROVI SIONS OF AMENDED SECTION 2(22)(E) ARE TO BE APPLIED ONLY TO THE PAYMENTS MAD E TO THE SHAREHOLDERS AND NOT TO ANY OTHER PERSON OR CONCERN OTHER THAN T HE SHAREHOLDERS. THE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. H. K. M ITTAL REPORTED IN 219 ITR 420 HELD THAT THE CHIEF INGREDIENT OF DIVIDEND AS D EFINED IN SUB CLAUSE (E) OF CLAUSE (22) OF SECTION 2 OF THE I T ACT IS THAT THE RECIPIENT SHOULD A SHAREHOLDER ON THE DAY THE LOAN WAS ADVANCED. IF TH AT FACT IS NOT ESTABLISHED, THERE CANNOT BE A DEEMED DIVIDEND. THE REFORE, THE PROVISIONS OF SEC. 2(22)(E) CANNOT BE APPLIED TO MARC AS IT IS NOT A SHAREHOLDER IN MTAR TECHNOLOGIES PVT. LTD. (HEREINAFTER CALLED AS MTAR). IN THIS REGARD, THE ASSESSEE RELIES ON THE DECISION OF THE ITAT MUM BAI BENCH 'G' IN THE CASE OF SEAMIST PROPERTIES PVT. LTD. VS. ITO REPORT ED IN (2005) 1 SOT PAGE 142. THE ASSESSEE FURTHER SUBMITS THAT THE PROVISIO NS OF SEC. 2(22)( E) MENTION AS UNDER: ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN W HICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS RE PRESENTING 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, B EING 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) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER, OR TO A NY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH H E HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFERRED TO AS T HE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE I NDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE CO MPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS' 11.4 THE ITAT MUMBAI SPECIAL BENCH IN CASE OF BHAU MIK COLOUR P. LTD. (SUPRA) HELD AS UNDER: 24. THE EXPRESSION 'SHAREHOLDER BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES' REFERRED TO IN THE FIRST LIMB OF S. 2(22)(E ) REFERS TO BOTH A REGISTERED SHAREHOLDER AND BENEFICIAL SHAREHOLDER. IF A PERSON IS A REGISTERED SHAREHOLDER BUT NOT THE BENEFICIAL THEN THE PROVISION OF S. 2(22)(E ) WILL NOT APPLY. SIMILARLY IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGIST ERED SHAREHOLDER THEN ALSO THE FIRST LIMB OF PROVISIONS OF S. 2(22)(E) WILL NOT AP PLY. 25. THE NEW CATEGORY OF PAYMENT WHICH WAS CONSIDERED A S DIVIDEND INTRODUCED BY THE FINANCE ACT, 1987 W.E.F. 1ST APRIL, 1988 BY THE SECOND LIMB OF S. 2(22)(E) IS PAYMENT 'TO ANY CONCERN IN WHICH SUCH SHAREHOLDER I S A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST'. IT IS THIS CATEGORY OF PAYMENT WITH WHICH WE ARE CONCERNED IN THIS REFERENCE. 26. THE FOLLOWING CONDITIONS ARE REQUIRED TO BE SATISF IED FOR APPLICATION OF THE ABOVE CATEGORY OF PAYMENT TO BE REGARDED AS DIVIDEN D. THEY ARE : (A) THERE MUST BE A PAYMENT TO A CONCERN BY A COMPA NY. ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 10 (B) A PERSON MUST BE A SHAREHOLDER OF THE COMPANY B EING A REGISTERED HOLDER AND BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITL ED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN P ROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER. THIS IS BECAUSE OF TH E EXPRESSION 'SUCH SHAREHOLDER' FOUND IN THE RELEVANT PROVISION. THIS EXPRESSION ON LY REFERS TO THE SHAREHOLDER REFERRED TO IN THE EARLIER PART OF S. 2(22)(E) VIZ. , A REGISTERED AND A BENEFICIAL HOLDER OF SHARES HOLDING 10 PER CENT VOTING POWER. THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF UNION OF INDIA VS. WAZIR SINGH AIR 1980 RAJ 252, WHILE DEALING WITH AN EXPRESSION 'NO SUCH APPLICATION' IN THE CON TEXT OF R. 97 OF THE RAJASTHAN HIGH COURT RULES, 1952 HAS HELD AS FOLLOWS : 'GENERALLY THE WORD SUCH REFERS ONLY TO PREVIOUSL Y INDICATED, CHARACTERIZED OR SPECIFIED. SUCH IS AN ADJECTIVE MEANING, THE ONE PREVIOUSLY INDICATED OR REFERS ONLY TO SOMETHING WHICH HAS BEEN SAID BEFORE.' THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF MOH AN LAL & ANR. VS. GRAIN CHAMBERS LTD. AIR 1959 ALL 279 HAS HELD AS FOLLOWS : 'IN FACT, IT APPEARS TO US THAT THE WORD SUCH IS USED BEFORE A NOUN IN A LATTER PART OF A SENTENCE, THE PROPER CONSTRUCTION IN THE ENGLI SH LANGUAGE IS TO HOLD THAT THE SAME NOUN IS BEING USED AFTER THE WORD SUCH WITH ALL ITS CHARACTERISTICS WHICH MIGHT HAVE BEEN INDICATED EARLIER IN THE SAME SENTE NCE.' (C) THE VERY SAME PERSON REFERRED TO IN (B) ABOVE M UST ALSO BE A MEMBER OR A PARTNER IN THE CONCERN HOLDING SUBSTANTIAL INTEREST IN THE CONCERN VIZ., WHEN THE CONCERN IS NOT A COMPANY, HE MUST AT ANY TIME DURIN G THE PREVIOUS YEAR, BE BENEFICIALLY ENTITLED TO NOT LESS THAN TWENTY PER C ENT OF THE INCOME OF SUCH CONCERN; AND WHERE THE CONCERN IS A COMPANY HE MUST BE THE O WNER OF SHARES, NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS, CARRYING NOT LESS THAN TWEN TY PER CENT OF THE VOTING POWER. (D) IF THE ABOVE CONDITIONS ARE SATISFIED THEN THE PAYMENT BY THE COMPANY TO THE CONCERN WILL BE DIVIDEND. 27. IN THE CASE OF THE ASSESSEE IT IS SEEN THAT CONDIT IONS (B) AND (C) ARE NOT SATISFIED INASMUCH AS NNT HELD SHARES IN UPPL AND B CPL ONLY AS A LEGAL AND REGISTERED OWNER BUT NOT AS A BENEFICIAL OWNER. IN THE CASE OF THE ASSESSEE IT IS SEEN THAT THE THREE TRUSTEES OF NNT HELD SHARES IN UPPL AND BCPL ONLY AS A LEGAL AND REGISTERED OWNER. THEY HELD SHARES FOR AND ON B EHALF OF 5 BENEFICIARIES OF THE TRUST WHO ARE DIFFERENT INDIVIDUALS. THEY WERE THER EFORE NOT BENEFICIAL OWNERS OF THE SHARES. TRUST OWNERSHIP IS A PECULIAR INSTANCE OF D UPLICATE OWNERSHIP. TRUST PROPERTY IS, IN FACT, OWNED BY TWO PERSONS SIMULTAN EOUSLY IN THE SENSE THAT ONE IS UNDER AN OBLIGATION TO USE THE PROPERTY FOR THE BEN EFIT OF THE OTHER. THE OWNERSHIP OF THE TRUSTEE CALLED TRUST OWNERSHIP IS NOMINAL RA THER THAN REAL. THE BENEFICIARY INTEREST IS CALLED THE BENEFICIAL INTEREST. THE TRU STEE IS TO ADMINISTER THE PROPERTY OF ANOTHER PERSON BUT THE OWNERSHIP RIGHT IN THE TRUST EE IS TO BE USED ONLY ON BEHALF OF THE REAL OWNER. AS BETWEEN TRUSTEE AND THIRD PAR TY OWNERSHIP CONFERRED ON THE TRUSTEE FICTITIOUSLY BY LAW PREVAILS, I.E., THE TRU STEE IS CLOTHED WITH THE RIGHTS OF THE BENEFICIARY AND IS SO ENABLED TO PERSONATE OR REPRE SENT HIM IN DEALINGS WITH THE WORLD AT LARGE. THE MAIN PURPOSE OF TRUSTEESHIP IS TO PROTECT THE RIGHTS AND INTEREST OF PERSON WHO FOR ANY REASON ARE UNABLE EFFECTIVELY TO PROTECT THEM FOR THEMSELVES. SUCH PROTECTION IS REQUIRED FOR FOUR CL ASSES OF PEOPLE, (A) UNBORN PERSONS; (B) INFANTS, LUNATICS, OR OTHER DISQUALIFI ED PERSONS; (C) A LARGE NUMBER OF PERSONS WHO ARE INTERESTED IN COMMON; AND (D) PERSO NS HAVING CONFLICTING INTEREST IN THE SAME PROPERTY, I.E., AN OWNER AND AN ENCUMBR ANCER OR DIFFERENT KINDS OF ENCUMBRANCES. THEREFORE, THE FIRST REQUIREMENT OF H OLDING OF SHARES BOTH AS A LEGAL REGISTERED OWNER AND BENEFICIAL OWNER OF SUCH SHARE S IS NOT SATISFIED IN THE CASE OF ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 11 THE ASSESSEE. THEREFORE, PROVISIONS OF S. 2(22)(E) WOULD NOT BE APPLICABLE AT ALL TO THE CASE OF THE ASSESSEE. 28. THE ANSWER TO THE SECOND QUESTION REFERRED TO THE SPECIAL BENCH IS THAT THE EXPRESSION SHAREHOLDER REFERRED TO IN S. 2(22)(E) REFERS TO BOTH A REGISTERED SHAREHOLDER AND BENEFICIAL SHAREHOLDER. IF A PERSON IS A REGISTERED SHAREHOLDER BUT NOT THE BENEFICIAL SHAREHOLDER THEN THE PROVISIONS OF S. 2(22)(E) WILL NOT APPLY. SIMILARLY, IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE PROVISIONS OF S. 2(22)(E) WILL NOT AP PLY. 29. IN VIEW OF THE FACT THAT THE ASSESSEE WAS NOT HOLD ING BENEFICIAL INTEREST IN SHARES OF BPCL AND UPPL, THERE IS NO REQUIREMENT OF ANSWERING THE FIRST QUESTION THAT ARISES FOR CONSIDERATION IN THE CASE OF THE AS SESSEE VIZ., AS TO WHETHER DEEMED DIVIDEND UNDER S. 2(22)(E) OF THE IT ACT, 1961 CAN BE ASSESSED IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER OF THE LENDER ? HOW EVER, IN THE CASE OF THE INTERVENER VIZ., ASSTT. CIT VS. WEAVELAND, ITA NO. 5036/DEL/2008 (SUPRA) THIS QUESTION NEEDS TO BE ANSWERED. THE FACTS IN THE CAS E OF THE INTERVENER HAVE ALREADY BEEN NARRATED EARLIER AND ARE NOT BEING REP EATED HERE. 30. AT THE OUTSET IT HAS TO BE MENTIONED THAT PROVISIO NS OF S. 2(22)(E) WHICH BROUGHT IN A NEW CATEGORY OF PAYMENT WHICH WAS TO B E CONSIDERED AS DIVIDEND AS INTRODUCED BY THE FINANCE ACT, 1987 W.E.F 1ST APRIL , 1988 VIZ., PAYMENT BY A COMPANY 'TO ANY CONCERN IN WHICH SUCH SHAREHOLDER I S A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST' DO NOT SAY, AS TO IN WHOSE HANDS THE DIVIDEND HAS TO BE BROUGHT TO TAX, WHETHER IN THE H ANDS OF THE 'CONCERN' OR THE 'SHAREHOLDER'. WE HAVE ALREADY SEEN THE DIVERGENT V IEWS ON THIS ISSUE WHICH HAVE BEEN REFERRED TO IN THE EARLIER PART OF THIS ORDER. 31. THE ABOVE PROVISIONS WERE SUBJECT-MATTER OF CONSID ERATION BEFORE THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. HOTEL H ILLTOP (SUPRA). THE FACTS OF THE CASE BEFORE THE HONBLE COURT WERE AS FOLLOWS. THE ASSESSEE WAS ONE M/S HOTEL HILLTOP A PARTNERSHIP FIRM. THIS FIRM RECEIVED AN A DVANCE OF RS. 10 LAKHS FROM A COMPANY M/S HILLTOP PALACE HOTELS (P) LTD. THE SHAR EHOLDING PATTERN OF M/S HILLTOP PALACE HOTELS (P) LTD., WAS AS FOLLOWS : 1. SHRI ROOP KUMAR KHURANA 23.33% 2. SMT. SAROJ KHURANA 4.67% 3. VIKAS KHURANA 22% 4. DESHBANDHU KHURANA 25% 5. SHRI RAJIV KHURANA 25% THE CONSTITUTION OF THE FIRM HOTEL HILLTOP WAS AS F OLLOWS : 1. SHRI ROOP KUMAR KHURANA 45% 2. SHRI DESHBANDHU KHURANA 55% ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 12 THE AO ASSESSED THE SUM OF RS. 10 LAKHS AS DEEMED D IVIDEND UNDER S. 2(22)(E) OF THE ACT IN THE HANDS OF THE FIRM BECAUSE THE TWO PA RTNERS OF M/S HOTEL HILLTOP WERE HOLDING SHARES BY WHICH THEY HAD 10 PER CENT VOTING POWER IN M/S HILLTOP PALACE HOTEL (P) LTD. THEY WERE ALSO ENTITLED TO 20 PER CE NT OF THE INCOME OF THE FIRM M/S HOTEL HILLTOP. THEREFORE THE LOAN BY M/S HILLTOP PA LACE HOTELS (P) LTD. TO THE FIRM M/S HOTEL HILLTOP WAS TREATED AS DEEMED DIVIDEND IN THE HANDS OF M/S HOTEL HILLTOP, THE FIRM UNDER THE SECOND LIMB OF S. 2(22)(E) OF TH E 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 FIRM WAS NOT CORRECT. THE ORDER OF THE CIT(A) WAS CONFIRMED BY THE TRIBUNAL. ON REVENUES APPEAL BEFO RE THE HONBLE HIGH COURT, THE FOLLOWING QUESTION OF LAW WAS FRAMED FOR CONSIDERAT ION : 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LEARNED TRIBUNAL WAS JUSTIFIED IN UPHOLDING THE ORDER OF LE ARNED CIT(A) DELETING THE ADDITION OF RS. 10 LAKHS AS DEEMED DIVIDEND UNDER S. 2(22)(E ) OF THE IT ACT ?' THE HONBLE COURT HELD AS FOLLOWS : 'THE IMPORTANT ASPECT, BEING THE REQUIREMENT OF S. 2(22)(E) IS, THAT THE PAYMENT MAY BE MADE TO ANY CONCERN, IN WHICH SUCH SHAREHOLD ER 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 ........ THUS, THE SUBSTANCE OF THE REQUIREMENT IS THAT THE PAYMENT SHOULD BE MADE ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER. OBVIOUSLY, THE PROVISION IS INTENDED TO ATTRACT THE LIABILITY OF T AX ON THE PERSON, 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 EVE NT, IT WOULD FALL WITHIN THE EXPRESSION DEEMED DIVIDEND. OBVIOUSLY, INCOME FRO M DIVIDEND IS TAXABLE AS INCOME FROM THE OTHER SOURCES UNDER S. 56, AND IN T HE 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 S HAREHOLDER. OF COURSE, THE TWO INDIVIDUALS BEING R AND D, ARE THE COMMON PERSONS, HOLDING MORE THAN REQUISITE AMOUNT OF SHAREHOLDING AND ARE HAVING REQUISITE INT EREST, IN THE FIRMS, BUT THEN, THEREBY THE DEEMED DIVIDEND WOULD NOT BE DEEMED DIV IDEND IN THE HANDS OF THE FIRM, RATHER IT WOULD OBVIOUSLY BE DEEMED DIVIDEND IN THE HANDS OF THE INDIVIDUALS, ON WHOSE BEHALF, OR ON WHOSE INDIVIDUAL BENEFIT, BE ING SUCH SHAREHOLDER, THE AMOUNT IS PAID BY THE COMPANY TO THE CONCERN. THUS, THE SIGNIFICANT REQUIREMENT OF S. 2(22)(E) IS NOT SHOWN TO EXIST. THE LIABILITY OF TAX, AS DEEMED DIVIDEND, COULD BE ATTRACTED IN THE HANDS OF THE INDIVIDUALS, BEING TH E SHAREHOLDERS, AND NOT IN THE HANDS OF THE FIRM.' 32. THE AFORESAID DECISION OF THE HONBLE RAJASTHAN HI GH COURT WHICH IS THE ONLY DECISION OF HIGH COURT, SHOULD BE SUFFICIENT TO ANS WER QUESTION NO. 2 WHICH HAS BEEN REFERRED TO THE SPECIAL BENCH BY HOLDING THAT DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO IS A SHA REHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THAN A SHARE HOLDER. THE ARGUMENT OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE HONBL E RAJASTHAN HIGH COURT DID NOT DEAL WITH THE SECOND LIMB OF S. 2(22)(E) OF THE ACT IS NOT CORRECT. 33. WE MAY ALSO TOUCH UPON CERTAIN OTHER ASPECTS OF TH E ISSUE IN THE LIGHT OF THE SUBMISSIONS MADE BEFORE US. THE TRIBUNAL IN THE CAS E OF NIKKO TECHNOLOGIES (I) (P) LTD. (SUPRA), WHILE HOLDING THAT THE PAYMENT MADE B Y A COMPANY EVEN TO A NON- SHAREHOLDER CAN BE BROUGHT TO TAX IN THE HANDS OF T HE NON-SHAREHOLDER HAS MADE THE FOLLOWING OBSERVATIONS : '12 ........... SEC. 2(22)(E) ONLY SPECIFIES THE CI RCUMSTANCES UNDER WHICH A PAYMENT BY WAY OF LOAN/ADVANCE IS TO BE TREATED AS DEEMED D IVIDEND. ONCE IT IS DETERMINED ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 13 THAT ANY PAYMENT BY WAY OF LOAN/ADVANCE FALLS WITHI N THE AMBIT OF S. 2(22)(E), THEN, IT HAS TO BE TREATED AS DIVIDEND EVEN THOUGH SUCH PAYMENT IN THE ORDINARY CIRCUMSTANCES MAY NOT BE CONSIDERED AS DIVIDEND. AT THIS POINT OF TIME, ROLE OF S. 2(22)(E) ENDS. IT NOWHERE PROVIDES AS TO WHO IS TO BE TAXED IN RESPECT 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 VS. CH. ATCHAIAH (1996) 130 CTR (SC) 404 : (1996) 218 ITR 239 (SC), AT PP. 243-244. 13. IN ORDER TO FIND OUT THE RIGHT PERSON, ONE HAS TO EXAMINE THE CHARGING PROVISIONS OF THE ACT. SECS. 4 AND 5 OF THE ACT ARE THE CHARGING PROVISIONS.......' THEREAFTER, THE TRIBUNAL HAS REFERRED TO THE PROVIS IONS OF S. 5(1) OF THE ACT AND HAS CONCLUDED THAT INCOME ACCRUES TO THE PERSON WHO IS THE RECIPIENT OF THE PAYMENT FROM THE COMPANY. THE TRIBUNAL HAS THEREAFTER REFER RED TO CIRCULAR NO. 495, DT. 22ND SEPT., 1987 OF THE CBDT WHEREIN IT HAS BEEN OP INED THAT DEEMED DIVIDEND WOULD BE TAXED IN THE HANDS OF A CONCERN (NON-SHARE HOLDER) ALSO IF THE CONDITIONS MENTIONED IN THE SECTION ARE SATISFIED. 34. WE ARE OF THE VIEW THAT THE PROVISIONS OF S. 2(22) (E) DO NOT SPELL OUT AS TO WHETHER THE INCOME HAS TO BE TAXED IN THE HANDS OF THE SHAREHOLDER OR THE CONCERN (NON-SHAREHOLDER). THE PROVISIONS ARE AMBIGUOUS. IT IS THEREFORE NECESSARY TO EXAMINE THE INTENTION BEHIND ENACTING THE PROVISION S OF S. 2(22)(E) OF THE ACT. 35. THE INTENTION BEHIND ENACTING PROVISIONS OF S. 2(2 2)(E) ARE THAT CLOSELY HELD COMPANIES (I.E., COMPANIES IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED), WHICH ARE CONTROLLED BY A GROUP OF MEMBERS, EVEN THOUGH T HE COMPANY HAS ACCUMULATED PROFITS WOULD NOT DISTRIBUTE SUCH PROFIT AS DIVIDEN D BECAUSE IF SO DISTRIBUTED THE DIVIDEND INCOME WOULD BECOME TAXABLE IN THE HANDS O F THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED PROFITS AS DIVIDEND, CO MPANIES DISTRIBUTE THEM AS LOAN OR ADVANCES TO SHAREHOLDERS OR TO CONCERN IN WHICH SUCH SHAREHOLDERS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER. IN SUCH AN EVENT, BY THE DEEMI NG PROVISIONS SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION B EHIND THE PROVISIONS OF S. 2(22)(E) IS TO TAX DIVIDEND IN THE HANDS OF SHAREHO LDER. THE DEEMING PROVISION AS IT APPLIES TO THE CASE OF LOANS OR ADVANCES BY A COMPA NY TO A CONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST IS BASED ON TH E 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 LE GISLATURE IS THEREFORE TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDER AND N OT IN THE HANDS OF THE CONCERN. 36. THE BASIS OF BRINGING IN THE AMENDMENT TO S. 2(22) (E) OF THE ACT BY THE FINANCE ACT, 1987 W.E.F 1ST APRIL, 1988 IS TO ENSUR E THAT PERSONS WHO CONTROL THE AFFAIRS OF A COMPANY AS WELL AS THAT OF A FIRM CAN HAVE THE PAYMENT MADE TO A CONCERN FROM THE COMPANY AND THE PERSON WHO CAN CON TROL 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 S. 5(1)(B) IN THE HANDS OF THE SHAREHOLDER ONLY AND NOT IN THE HANDS OF THE PAYEE VIZ., NON-SHAREHOLDER (CONCERN). SEC. 5(1)(A) CONTE MPLATES THAT THE RECEIPT OR DEEMED RECEIPT SHOULD BE IN THE NATURE OF INCOME. T HEREFORE THE DEEMING FICTION CAN BE APPLIED ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT THE NON-SHAREHOLDER VIZ., THE CONCERN. ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 14 37. THE DEFINITION OF DIVIDEND UNDER S. 2(22)(E) OF TH E ACT IS AN INCLUSIVE DEFINITION. SUCH INCLUSIVE DEFINITION ENLARGES THE MEANING OF T HE TERM 'DIVIDEND' ACCORDING TO ITS ORDINARY 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 TERM DIVIDEND W OULD 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 ADVANC ES 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 NATURAL MEANING OF THE WORD 'DIVIDEND' IS ALTERED. TO THIS EXTENT THE DEFI NITION 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 NATURAL MEAN ING OF THE WORD 'DIVIDEND' IS TAKEN AWAY. IN THE LIGHT OF THE INTENTION BEHIND TH E PROVISIONS OF S. 2(22)(E) AND IN THE ABSENCE OF INDICATION IN S. 2(22)(E) TO EXTEND THE LEGAL FICTION TO A CASE OF LOAN OR ADVANCE TO A NON-SHAREHOLDER ALSO, WE ARE OF THE VIEW THAT LOAN OR ADVANCE TO A NON-SHAREHOLDER CANNOT BE TAXED AS DEEMED DIVIDEND IN THE HANDS OF A NON- SHAREHOLDER. 38. THE BASIC CHARACTERISTIC OF DIVIDEND AS HELD BY TH E APEX COURT IN THE CASE OF KANTILAL MANILAL VS. CIT (1961) 41 ITR 275 (SC) IS A SHARE OF PROFITS OF THE COMPANY GIVEN TO ITS SHAREHOLDERS. FURTHER, S. 206 OF THE C OMPANIES 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 TWO COMPONENTS EMERGE (A) DIVIDEND IS A SHARE OF PROFITS OF THE COMPANY; (B) PAID TO ITS SHAREHOLDERS. SEC. 2(22) OF THE ACT ARTIFICIALLY EXTENDS THE SCOPE OF DIVIDEND FROM BEING MORE THAN ONLY A DISTRIBUTION OF PROFITS TO COVER CERTAIN OTH ER TYPES OF DISBURSEMENTS SUCH AS LOANS PAID ETC. (THE FIRST INGREDIENT MENTIONED ABO VE). IT DOES NOT HOWEVER ALTER THE SECOND COMPONENT OF ITS NATURAL MEANING VIZ. PA ID TO ITS SHAREHOLDER. IN OTHER WORDS, ALL THAT S. 2(22) SEEKS TO DO IS TO EXPAND T HE VARIOUS TYPES OF PAYMENTS THAT MAY BE REGARDED AS DIVIDEND. THE APEX COURT WHILE C ONSIDERING WHAT CAN COME WITHIN THE ARTIFICIAL DEFINITION OF DIVIDEND UNDER S. 2(22) IN THE CASE OF CIT VS. NALIN BEHARI LALL SINGHA (1969) 74 ITR 849 (SC), DESCRIBE D THE SCOPE OF THE DEFINITION OF DIVIDEND THUS 'THE DEFINITION IS, IT IS TRUE, AN INCLUSIVE DEFINI TION AND A RECEIPT BY A SHAREHOLDER WHICH DOES NOT FALL WITHIN THE DEFINITION MAY POSSI BLY BE REGARDED AS DIVIDEND WITHIN THE MEANING OF THE ACT UNLESS THE CONTEXT NE GATIVES THAT VIEW.' THE CONTENTION OF THE DEPARTMENTAL REPRESENTATIVE T HAT PROVISIONS OF S. 8(A) OF THE ACT CREATE A FICTION BY WHICH EVEN PAYMENTS TO NON- SHAREHOLDERS CAN BE CONSTRUED AS DIVIDEND CANNOT BE ACCEPTED. THOSE PROVISIONS ME RELY FIX THE YEAR IN WHICH DIVIDEND HAS TO BE TAXED. IT IS THEREFORE CLEAR THA T THE SHAREHOLDER ALONE CAN, IF AT ALL, BE SUBJECTED TO TAX FOR HAVING EARNED DIVIDEND . 39. IN THE DECISION OF THE TRIBUNAL IN THE CASE OF NIK KO TECHNOLOGIES (I) (P) LTD. (SUPRA), RELIANCE HAS BEEN PLACED ON CIRCULAR NO. 4 95, DT. 22ND SEPT., 1987 WHICH STATES AS FOLLOWS : 'FURTHER DEEMED DIVIDEND WOULD BE TAXABLE IN THE HA NDS OF THE CONCERN, WHERE ALL THE FOLLOWING CONDITIONS ARE SATISFIED............. ....' WE ARE OF THE VIEW THAT CIRCULARS OF CBDT TO THE EX TENT THAT THEY DO NOT TONE DOWN THE RIGOR OF THE PROVISIONS OF THE ACT IN THE SENSE TO THE EXTENT THEY ARE NOT BENEVOLENT ARE NOT BINDING. 40. APART FROM THE ABOVE, IT IS ALSO NOTICED THAT S. 2 (22)(E)(III) PROVIDES RELIEF TO A SHAREHOLDER AS FOLLOWS : ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 15 'DIVIDEND DOES NOT INCLUDE : (I) TO (II).......... (III) ANY DIVIDEND PAID BY A COMPANY WHICH IS SET O FF BY THE COMPANY AGAINST THE WHOLE OR ANY PART OF ANY SUM PREVIOUSLY PAID BY IT AND TREATED AS A DIVIDEND WITHIN THE MEANING OF SUB-CL. (E) TO THE EXTENT TO WHICH I T 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 C ONCERN CAN NEVER RECEIVE DIVIDEND FROM THE COMPANY WHICH IS ONLY PAID TO THE SHAREHOLDER, WHO HAS SUBSTANTIAL INTEREST IN THE CONCERN. THE ABOVE PROV ISIONS ALSO THEREFORE CONTEMPLATE DEEMED DIVIDEND BEING TAXED IN THE HAND S OF A SHAREHOLDER ONLY. FOR THE REASONS STATED ABOVE, WE ARE OF THE VIEW THAT T HE LAW LAID DOWN IN THE CASE OF NIKKO TECHNOLOGIES (I) (P) LTD. (SUPRA) IS NOT CORR ECT. WE THEREFORE HOLD THAT DEEMED DIVIDEND UNDER S. 2(22)(E) OF THE IT ACT, 19 61 CAN BE ASSESSED ONLY IN THE HANDS OF A SHAREHOLDER OF THE LENDER COMPANY AND NO T IN THE HANDS OF ANY OTHER PERSON. 41. IN THE LIGHT OF THE ABOVE DISCUSSION, THE QUESTION S REFERRED TO THE SPECIAL BENCH ARE ANSWERED AS FOLLOWS : ON THE FIRST QUESTION : DEEMED DIVIDEND CAN BE ASSE SSED ONLY IN THE HANDS OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY A ND NOT IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER. ON THE SECOND QUESTION : THE EXPRESSION SHAREHOLDE R REFERRED TO IN S. 2(22)(E) REFERS TO BOTH A REGISTERED SHAREHOLDER AND BENEFIC IAL SHAREHOLDER. IF A PERSON IS A REGISTERED SHAREHOLDER BUT NOT THE BENEFICIAL SHARE HOLDER THEN THE PROVISIONS OF S. 2(22)(E) WILL NOT APPLY. SIMILARLY, IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE PROVISIONS OF S. 2(22)(E) WILL NOT APPLY. 11.5 THE INTENTION OF THE LEGISLATURE IS CLARIFIED IN CIRCULAR ISSUED BY THE CBDT AS AT THE TIME OF AMENDMENT OF CLAUSE (E) OF SUB SE CTION (22) OF SEC. 2 IS FURTHER FORTIFIED BY THE FACT THAT FOR DEDUCTION OF TAX AT SOURCE. SEC. 194 PROVIDE THAT SUCH DEDUCTION OF TAX HAS TO BE MADE IN THE CASE OF THE PAYMENTS OF THE NATURE MENTIONED IN CLAUSES (A), (B), (C), (D) AND (E) OF SUB SECTION (22) OF SECTION 2 ONLY IN A CASE WHERE SUCH PAYMENTS WERE MADE TO A S HAREHOLDER. SECTION 199 ALSO INDICATES THAT ADJUSTMENT OF TDS WOULD BE PROV IDED IN THE ASSESSMENT OF SHAREHOLDER ONLY. THE VERY FACT THAT THE PROVISION FOR DEDUCTION OF TAX AT SOURCE AND ADJUSTMENT OF TAX IS ONLY IN RESPECT OF THE PAY MENTS TO THE' SHAREHOLDER WOULD CLEARLY INDICATE THAT EVEN AFTER THE AMENDMEN T, THE EFFECT OF CLAUSE (E) OF SUB SECTION (22) OF SEC. 2 WOULD APPLY ONLY WHEN TH E PAYMENT IS MADE TO SHAREHOLDER. WHEREVER, THE TAX IS TO BE DEDUCTED AT SOURCE FROM A DIVIDEND OR DEEMED DIVIDEND AND THE CONSEQUENTIAL EFFECT OF GIV ING EFFECT TO SUCH DEDUCTION OF TAX AT SOURCE, ETC., REFERENCE WAS MADE ONLY TO THE PAYMENTS TO THE ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 16 SHAREHOLDER. THIS WOULD INDICATE CLEARLY THAT CLAUS E (E) WOULD APPLY ONLY IN CASE OF PAYMENTS TO THE SHAREHOLDER AND NOT TO OTHERS. 11.6 IN VIEW OF THE FOREGOING DISCUSSION AND FOLLOW ING THE SPECIAL BENCH DECISION OF MUMBAI TRIBUNAL IN THE CASE OF ACIT VS. BHAUMIC COLOUR PVT. LTD. AS WELL AS THE DECISION OF THE HONBLE DELHI HIGH C OURT IN THE CASE OF CIT VS. ANKITECH P. LTD., WE HOLD THAT THE DIVIDEND INCOME IS TAXABLE IN THE HANDS OF SHAREHOLDERS AND NOT IN THE HANDS OF THE CONCERN. A CCORDINGLY, WE DISMISS THE ASSESSEES GROUND ON THIS ISSUE. 7. IN THE INSTANT CASE, THE ASSESSEE IS NOT THE SHA REHOLDER IN THE PAYER COMPANY M/S. MAHA MARUTI LOGISTICS PVT. LIMIT ED. THEREFORE, THE DECISION OF HONBLE ITAT HYDERABAD BENCH AND THE SP ECIAL BENCH IN THE CASE OF BHOWMICK COLOUR LAB PVT. LTD. 120 TTJ (MUM) 865 (SB) AND THE DECISION OF HONBLE HIGH COURT OF DELHI CITED (SUPR A) ARE SQUARELY APPLICABLE IN THE ASSESSEES CASE. THEREFORE, WE D O NOT FIND ANY INFIRMITY IN THE ORDER OF LD. CIT(A) AND THE SAME I S UPHELD. ITA NO.226/VIZAG/2015 M/S. CONZUG LOGISTICS PVT. LTD., VSKP 17 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT O N 21 ST JUN17. ( . ) ( . . ) (V. DURGA RAO) (D.S. SUNDER SINGH) /JUDICIAL MEMBER /ACCOUNTANT MEMBER /VISAKHAPATNAM: /DATED : 21.06.2017 VG/SPS /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANT THE DCIT, CENTRAL CIRCLE-2, VIJA YAWADA 2. / THE RESPONDENT M/S. CONZUG LOGISTICS PVT. LTD. , D.NO.48-12-7/15, S-1, MANASA APARTMENTS, SRINAGAR, VISAKHAPATNAM-530 016. 3. / THE PRINCIPAL CIT (CENTRAL), HYDERABAD 4. ( ) / THE CIT (A)-3 (I/C), VSAKHAPATNAM, CAMP: HYDERA BAD 5. , , / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // SR. PRIVATE SECRETARY ITAT, VISAKHAPATNAM