D.C.I.T., Cen. Circle-VIII, Kolkata, Kolkata V. M/s East End Silks (P) Ltd., Kolkata

ITA 38/KOL/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 4685 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 7 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-08-2016
• Appeal Filed By: Department
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 08-01-2014
• Court: TRIBUNAL
• Department Lawyers: RAJAT KUMAR KUREEL
• Keywords: Deemed dividend
• Section: 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : KOLKATA [BEFORE HONBLE SRI N.V.VASUDEVAN, JM & DR.ARJUN LAL SAINI, AM] I.T.A NO. 38/KOL/2014 ASSESSMENT YEAR : 2010-1 1 D.C.I.T., CENTRAL CIRCLE-VIII, -VS.- M/S. EAST END SILKS (P)LTD. KOLKATA KOLKATA [PAN : AAACE 5742 L] (APPELLANT) (RESPONDENT) FOR THE APPELLANT : SHRI RAJAT KUMAR K UREEL, JCIT. SR.DR FOR THE RESPONDENT : SHRI ANIL KOCHAR, AR DATE OF HEARING : 04.08.2016. DATE OF PRONOUNCEMENT : 10.08.2016. ORDER PER N.V.VASUDEVAN, JM THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 29.11.2013 OF CIT(A)- CENTRAL-I, KOLKATA RELATING TO AY 2010-11. 2. THE UNDISPUTED FACTS ARE THAT THE ASSESSEE HAD RECEIVED LOAN FROM M/S PATAKA INDUSTRIES (P) LTD., OF RS.3,62,46,645/-. THE AO W AS OF THE VIEW THE SAID AMOUNT RECEIVED AS LOAN SHOULD BE TREATED AS DEEMED DIVIDE ND U/S. 2(22)(E) OF THE INCOME TAX ACT, 1961 (ACT). THE ASSESSEE SUBMITTED THAT IT WAS NOT A SHAREHOLDER IN M/S.PATAKA INDUSTRIES (P) LTD., AND CONSEQUENTLY THE AMOUNT CO ULD NOT BE HELD TO BE DEEMED DIVIDEND BY APPLYING THE PROVISIONS OF SECTION 2(22 )(E) OF THE ACT. 3. THE AO HOWEVER, WAS OF THE VIEW THAT THOUGH THE ASSESSEE WAS NOT A SHAREHOLDER IN M/S.PATAKA INDUSTRIES (P) LTD., ONE SHRI.ABDUL KALAM WAS A COMMON SHAREHOLDER IN BOTH THE ASSESSEE AND M/S.PATAKA IND USTRIES (P) LTD., HOLDING 12.93% AND 20% PAID UP SHARE CAPITAL RESPECTIVELY IN THE AFORESAID TWO COMPANIES AND 2 ITA NO.38/KOL/2014 M/S. EAST END SILKS (P)LTD.. A.YR.2010-11 2 THEREFORE THE PROVISIONS OF SEC.2(22)( E) OF THE AC T WOULD BE ATTRACTED. THE AO ULTIMATELY PASSED AN ORDER TREATING THE LOAN IN QUE STION AS A DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE. 4. ON APPEAL BY THE ASSESSEE THE CIT(A) DELETED TH E ADDITION MADE BY THE AO FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES O WN CASE IN THE EARLIER YEAR ON IDENTICAL ISSUE. THE FOLLOWING WERE THE RELEVANT O BSERVATIONS OF THE CIT(A) IN THIS REGARD: 5. THE LD. AR HAS SUBMITTED THAT THE PROVISIONS OF SECTION 2(22)(E) WAS NOT ATTRACTED AS THE ASSESSEE WAS NOT A SHAREHOLDER IN M/S. PATAKA I NDUSTRIES (P)LTD FROM WHICH LOAN WAS RECEIVED. HE HAD FURTHER SUBMITTED THAT THE ISSUE W AS COVERED BY THE ORDER OF JURISDICTIONAL ITAT FOR THE ASSESSMENT YEAR 2006-07 . FOR IN THAT YEAR, SIMILAR ADDITION WAS MADE BY THE AO IN HIS ASSESSMENT ORDER U/S 263/143( 3) IN CONSEQUENCE TO AN ORDER U/S 263 PASSED BY THE LD. CIT, CENTRAL-I, KOLKATA. BUT THEN, THE SAID ORDER U/S 263 WAS QUASHED BY THE HONBLE ITAT VIDE ITS ORDER DATED 29 -02-2012 IN ITA NO.533/KOL/2011 READ WITH ITS ORDER DATED 31-07-2012 IN MA NO.35/KO L/2012). IN ITS ORDER, THE HONBLE ITAT A BENCH, KOLKATA HAS HELD AS UNDER :- 3. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ON IDENTICAL SET OF FACTS THE DECISION OF THE HONBLE RAJASTHAN HIGH CO URT IN THE CASE OF CIT VS HOTEL HILLTOP REPORTED IN 313 ITR 116 (RAJ) IS DIRECTLY IN FAVOUR OF THE ASSESSEE IS NOT A SHAREHOLDER OF PATAKA INDUSTRIES (P)LTD AND ACCORDI NGLY, PROCEEDINGS U/S 2(22)(E) COULD NOT BE INITIATED AGAINST THE ASSESSEE AND THE AMOUN T OF LOAN COULD NOT BE TREATED AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE. HOWEV ER, THE LEARNED DR RELIED ON THE ORDER U/S 263 OF THE LEARNED COMMISSIONER OF INCOME TAX. 4. ON CONSIDERATION OF RIVAL SUBMISSIONS, WE ARE OF THE VIEW THAT THE VIEW TAKEN BY THE ASSESSING OFFICER THAT TRANSACTION WILL ATTRACT THE SECTION 2(22)(E) FOR DEEMED DIVIDEND AND IT COULD BE TAXED IN THE HANDS OF THE ASSESSEE , WHO IS OTHER THAN SHAREHOLDER, IS NOT CORRECT. THE SAID DECISION OF HONBLE RAJASTHAN HIG H COURT IS DIRECTLY ON THE ISSUE. RESPECTFULLY FOLLOWING SAME, WE QUASH THE IMPUGNED ORDER PASSED U/S 263 OF THE LEARNED COMMISSIONER OF INCOME TAX AND ALLOW THE AP PEAL OF THE ASSESSEE. 6. THE LD AR HAS FURTHER SUBMITTED THAT THE ISSUE W AS AGAIN DECIDED IN FAVOUR OF THE ASSESSEE IN ITS OWN CASE FOR THE ASSESSMENT YEAR 20 09-10 BY THE JURISDICTIONAL ITAT A BENCH, KOLKATA IN ITA NO.1803/KOL/2012. I HAVE PERU SED THE RELEVANT ORDERS AND CONSIDERED THE SUBMISSIONS MADE ON BEHALF OF THE AS SESSEE. THE CONTENTION THAT THE ASSESSEE COMPANY WAS NOT A SHAREHOLDER IN M/S. PATA KA INDUSTRIES (P)LTD. FROM WHICH LOAN WAS RECEIVED HAS NOT BEEN DISPUTED BY THE AO I N HIS ASSESSMENT ORDER. IN SUCH FACTUAL BACKGROUND, I FIND THAT THE ISSUE IS COVERE D BY THE DECISION OF THE JURISDICTIONAL ITAT IN ASSESSEES OWN CASE IN ITA NO.533/KOL/2011 READ WITH MA NO.35/KOL/2012. RESPECTFULLY FOLLOWING THE DECISION OF THE JURISDIC TIONAL ITAT, IT IS TO BE HELD THAT THE SUM 3 ITA NO.38/KOL/2014 M/S. EAST END SILKS (P)LTD.. A.YR.2010-11 3 OF RS.3,62,46,645/- IS NOT ASSESSABLE AS DEEMED DIV IDEND U/S 2(22)(E). THE ADDITION OF RS.3,62,46,645/- IS DELETED. GROUND NO.2 AND 3 IS ALLOWED. 5. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVEN UE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 6. WE HAVE HEARD THE SUBMISSION OF THE LEARNED DR W HO RELIED ON THE ORDER OF THE AO. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF THE CIT(A) AND FILED BEFORE US COPY OF THE ORDER OF THE HONBLE HIGH COU RT OF CALCUTTA, IN G.A.NO.3188 OF 2013 DATED 11.11.2014 WHEREIN THE HONBLE HIGH COUR T DISMISSED THE APPEAL PREFERRED BY THE REVENUE AGAINST THE ORDER OF THE TRIBUNAL IN ITA NO.1803/KOL/2012 DATED 16.5.2013 BASED ON WHICH THE CIT(A) ALLOWED RELIEF TO THE ASSESSEE IN AY 2009-10. 7. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED CO UNSEL FOR THE ASSESSEE. THE PROVISIONS OF SEC.2(22)(E) OF THE ACT, READS AS FOL LOWS: (E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH 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 31-5-1987, 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 PROFITS) HOLDING NOT LESS THAN TEN P ER CENT OF THE VOTING POWER, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER O R A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUS E REFERRED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FO R THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPAN Y IN EITHER CASE POSSESSES ACCUMULATED PROFITS. EXPLANATION-3 TO SECTION 2(22)(E) IS AS FOLLOWS: EXPLANATION-3: FOR THE PURPOSE OF THIS CLAUSE- (A) CONCERN MEANS A HINDU UNDIVIDED FAMILY, OR A FIRM OR AN ASSOCIATION OF PERSONS OR A BODY OF INDIVIDUALS OR A COMPANY; (B) A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL INTEREST IN A CONCERN, OTHER THAN A COMPANY, IF HE IS, AT ANY TIME DURING THE PREVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LESS THAN TWENTY PERCENT OF THE INCOME OF SUCH CONCERN; 4 ITA NO.38/KOL/2014 M/S. EAST END SILKS (P)LTD.. A.YR.2010-11 4 7.1. SECTION 2(32) DEFINES THE EXPRESSION PERSON WHO HA S A SUBSTANTIAL INTEREST IN THE COMPANY, IN RELATION TO A COMPANY, MEANS A PER SON WHO IS THE BENEFICIAL OWNER OF SHARES, NOT BEING SHARES ENTITLED TO A FIXED RATE O F DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS, CARRYING NOT LESS THAN TWENTY PERCENT OF THE VOTING POWER. 7.2. AN ANALYSIS OF THE ABOVE PROVISIONS SHOWS THAT THERE ARE THREE LIMBS TO SEC.2(22)(E) WHICH ARE AS FOLLOWS:- ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN W HICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS REPRESENTING A P ART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MADE AFTER THE 31-5-1987 , BY WAY OF ADVANCE OR LOAN FIRST LIMB (A) TO A SHAREHOLDER, BEING A PERSON WHO IS THE BEN EFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH O R WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING PO WER, SECOND LIMB (B) OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUS E REFERRED TO AS THE SAID CONCERN) THIRD LIMB (C) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE P OSSESSES ACCUMULATED PROFITS. 7.3. IN THE PRESENT APPEAL WE ARE CONCERNED WITH TH E SECOND LIMB OF SEC.2(22)(E) OF THE ACT, VIZ., TO ANY CONCERN IN WHICH SUCH SHAREH OLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST. THE FOLLOWING CONDITIONS ARE REQUIRED TO BE SATISFIED FOR APPLICATION OF THE ABOVE CATEGORY OF PAYMENT TO BE REGARDED AS DIVIDEND. THEY ARE:- (A) THERE MUST BE A PAYMENT TO A CONCERN BY A COMPA NY. (B) A PERSON MUST BE SHAREHOLDER OF THE COMPANY BEI NG 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 THE EXPRESSION SUCH SHAREHOLDER FOUND IN THE RELEVANT PROVISION. THIS EXPRESSION ONLY REFERS TO THE SHAREHOLDER REFERRED TO IN THE EARLIER PART OF SEC. 2(22)(E) VIZ., A REGISTERED AND A BENEFICIAL HOLDER OF SHARES HOLDING 10% VOTING POWE R. 5 ITA NO.38/KOL/2014 M/S. EAST END SILKS (P)LTD.. A.YR.2010-11 5 (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 PERCE NT OF THE INCOME OF SUCH CONCERN; AND WHERE THE CONCERN IS A COMPANY HE MUST BE THE OWNER OF SHARES, NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDE ND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS, CARRYING NOT LESS THAN TWENTY PERCENT OF THE VOTING POWER (D) IF THE ABOVE CONDITIONS ARE SATISFIED THEN THE PAYMENT BY THE COMPANY TO THE CONCERN WILL BE DIVIDEND. 7.4. THE SPECIAL BENCH OF ITAT, MUMBAI, IN THE CASE OF BHAUMIK COLOR LABS ITA 5030/M/04, 118 ITD 1 (SB) (MUM), CONSIDERED THE QUE STION WHETHER DEEMED DIVIDEND U/S. 2(22)(E) OF THE INCOME TAX ACT, 1961 CAN BE AS SESSED IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER OF THE LENDER? THE SPECIAL BENC H HELD 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 SHAREHOLD ER. THE SPECIAL BENCH ON THE ABOVE ISSUE HAS OBSERVED AS FOLLOWS:- 30. AT THE OUTSET IT HAS TO BE MENTIONED THAT PRO VISIONS OF SEC.2(22)(E) WHICH BROUGHT IN A NEW CATEGORY OF PAYMENT WHICH WAS TO B E CONSIDERED AS DIVIDEND AS INTRODUCED BY THE FINANCE ACT 1987 W.E.F.1-4-88 VIZ ., PAYMENT BY A COMPANY TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER O R 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 HANDS OF THE CONCERN OR THE SHAREHOLDER. WE HAVE ALREADY SEEN THE DIVERGENT VIEWS ON THIS ISSUE WHICH HAVE BEEN REFERRED TO IN THE EARLIER PART OF THIS O RDER. 31. THE ABOVE PROVISIONS WERE SUBJECT MATTER OF CO NSIDERATION BEFORE THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. HOTEL HILLTOP. 217 CTR 527(RAJ). THE FACTS OF THE CASE BEFORE THE HONBLE COURT WERE AS FOLLOWS. THE ASSESSEE WAS ONE M/S.HOTEL HILLTOP A PARTNERSHIP FI RM. THIS FIRM RECEIVED AN ADVANCE OF RS.10 LACS FROM A COMPANY M/S.HILLTOP PA LACE HOTELS (P) LTD. THE SHAREHOLDING PATTERN OF M/S.HILLLTOP PALACE HOTELS (P) LTD., WAS AS FOLLOWS: 1. SHRI ROOP KUMAR KHURANA : 23.33% 2. SMT.SAROJ KHURANA : 4.67% 3. VIKAS KHURANA : 22% 4. DESHBANDHU KHURANA: 25% 6 ITA NO.38/KOL/2014 M/S. EAST END SILKS (P)LTD.. A.YR.2010-11 6 5. SHRI.RAJIV KHURANA : 25% THE CONSTITUTION OF THE FIRM HOTEL HILL TOP WAS AS FOLLOWS: 1. SHRI ROOP KUMAR KHURANA: 45% 2. SHRI.DESHBANDHU KHURANA: 55% THE AO ASSESSED THE SUM OF RS.10 LACS AS DEEMED DIV IDEND U/S.2(22)(E) OF THE ACT IN THE HANDS OF THE FIRM BECAUSE THE TWO PARTNERS O F M/S.HOTEL HILL TOP WERE HOLDING SHARES BY WHICH THEY HAD 10% VOTING POWER I N M/S.HILL TOP PALACE HOTELS (P) LTD. THEY WERE ALSO ENTITLED TO 20% OF T HE INCOME OF THE FIRM M/S.HOTEL HILL TOP. THEREFORE THE LOAN BY M/S.HILL TOP PALACE HOTELS (P) LTD. TO THE FIRM M/S.HOTEL HILL TOP WAS TREATED AS DEEME D DIVIDEND IN THE HANDS OF M/S.HOTEL HILL TOP, THE FIRM UNDER THE SECOND LIMB OF SEC.2(22)(E) OF THE ACT. THE CIT(A) HELD THAT SINCE THE FIRM WAS NOT THE SHA REHOLDER OF THE COMPANY THE ASSESSMENT AS DEEMED DIVIDEND IN THE HANDS OF THE F IRM WAS NOT CORRECT. THE ORDER OF THE CIT(A) WAS CONFIRMED BY THE TRIBUNAL. ON REVENUES APPEAL BEFORE THE HONBLE HIGH COURT, THE FOLLOWING QUESTION OF L AW WAS FRAMED FOR CONSIDERATION:- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED TRIBUNAL WAS JUSTIFIED IN UPHOLDING THE ORDER OF LEARNED CIT(A) DELETING THE ADDITION OF RS.10 LACS AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE IT ACT? THE HONBLE COURT HELD AS FOLLOWS:- THE IMPORTANT ASPECT, BEING THE REQUIREMENT OF SE CTION 2(22)(E) IS, THAT THE PAYMENT MAY BE MADE TO ANY CONCERN, IN WH ICH SUCH SHAREHOLDER IS A MEMBER, OR THE PARTNER, AND IN WHI CH HE HAS SUBSTANTIAL INTEREST, OR ANY PAYMENT BY ANY SUCH CO MPANY, ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER . THUS, THE SUBSTANCE OF THE REQUIREMENT IS THAT THE PAYMENT SH OULD BE MADE ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER, OBVIOUSLY, THE PROVISION IS INTENDED TO ATTRACT THE LIABILITY OF TAX ON THE PERSON, ON WHOSE BEHALF, OR FOR WHOSE INDIVIDUAL BE NEFIT, THE AMOUNT IS PAD BY THE COMPANY, WHETHER TO THE SHAREHOLDER, OR TO THE CONCERNED FIRM. IN WHICH EVENT, IT WOULD FALL WITHIN THE EXPR ESSION DEEMED DIVIDEND. OBVIOUSLY, INCOME FROM DIVIDEND, IS TAXA BLE AS INCOME FROM THE OTHER SOURCES UNDER SECTION 56, AND IN THE VERY NATURE OF THINGS THE INCOME HAS TO BE OF THE PERSON EARNING THE INCOME. THE ASSESSEE IN THE PRESENT CASE IS NOT SHOWN TO BE ONE OF THE PERSONS, BEING SHAREHOLDER. OF COURSE, THE TWO INDIVIDUALS BEING R AND D. ARE T HE COMMON PERSONS, 7 ITA NO.38/KOL/2014 M/S. EAST END SILKS (P)LTD.. A.YR.2010-11 7 HOLDING MORE THAN REQUISITE AMOUNT OF SHAREHOLDING AND ARE HAVING REQUISITE INTEREST, IN THE FIRM, BUT THEN, THEREBY THE DEEMED DIVIDEND WOULD NOT BE DEEMED DIVIDEND IN THE HANDS OF THE FI RM, RATHER IT WOULD OBVIOUSLY BE DEEMED DIVIDEND IN THE HANDS OF THE IN DIVIDUALS, ON WHOSE BEHALF, OR ON WHOSE INDIVIDUAL BENEFIT, BEING SUCH SHAREHOLDER, THE AMOUNT IS PAID BY THE COMPANY TO THE CONCERN. THUS, THE SIGNIFICANT REQUIREMENT OF SECTION 2(22)(E) IS NOT SHOWN TO EXI ST. THE LIABILITY OF TAX, AS DEEMED DIVIDED, COULD BE ATTRACTED IN THE H ANDS OF THE INDIVIDUALS, BEING THE SHAREHOLDERS, AND NOT IN THE HANDS OF THE FIRM. 32. THE AFORESAID DECISION OF THE HONBLE RAJASTHA N HIGH COURT WHICH IS THE ONLY DECISION OF HIGH COURT, SHOULD BE SUFFICIENT T O ANSWER QUESTION NO.2 WHICH HAS BEEN REFERRED TO THE SPECIAL BENCH BY HOLDING T HAT 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 SHAREHOLDER. THE ARGUMENT OF THE LEARNED D.R. THAT THE HONBLE RAJAS THAN HIGH COURT DID NOT DEAL WITH THE SECOND LIMB OF SEC.2(22)(E) OF THE ACT IS NOT CORRECT. 7.5. THE SPECIAL BENCH FURTHER HELD AS FOLLOWS:- 34. WE ARE OF THE VIEW THAT THE PROVISIONS OF SEC .2(22)(E) DOES NOT SPELL OUT AS TO WHETHER THE INCOME HAS TO BE TAXED IN THE HANDS OF THE SHAREHOLDER OR THE CONCERN(NON-SHAREHOLDER). THE PROVISIONS ARE AMBIG UOUS. IT IS THEREFORE NECESSARY TO EXAMINE THE INTENTION BEHIND ENACTING THE PROVISIONS OF SEC.2(22)(E) OF THE ACT. 35. THE INTENTION BEHIND ENACTING PROVISIONS OF SE CTION 2(22)(E) ARE THAT CLOSELY HELD COMPANIES (I.E. COMPANIES IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED), WHICH ARE CONTROLLED BY A GROUP OF MEMBERS, EVEN TH OUGH THE COMPANY HAS ACCUMULATED PROFITS WOULD NOT DISTRIBUTE SUCH PROFI T AS DIVIDEND BECAUSE IF SO DISTRIBUTED THE DIVIDEND INCOME WOULD BECAME TAXABL E IN THE HANDS OF THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED P ROFITS AS DIVIDEND, COMPANIES 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 DEEMING PROVISIONS SUCH PAYMENT BY THE COMPANY IS TREATED A S 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 T O THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH ITS SH AREHOLDER HAS SUBSTANTIAL INTEREST, IS BASED ON THE PRESUMPTION THAT THE LOA N OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPAN Y GIVING THE LOAN OR 8 ITA NO.38/KOL/2014 M/S. EAST END SILKS (P)LTD.. A.YR.2010-11 8 ADVANCE. THE INTENTION OF THE LEGISLATURE IS THEREF ORE TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF TH E CONCERN. 36. THE BASIS OF BRINGING IN THE AMENDMENT TO SEC. 2(22)(E) OF THE ACT BY THE FINANCE ACT, 1987 W.E.F 1-4-88 IS TO ENSURE THAT PE RSONS 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 DRAWN THE SAME FROM THE CONCERN INSTEAD OF THE COMP ANY 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 S HAREHOLDER 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 W ORDS THERE IS A DEEMED ACCRUAL OF INCOME EVEN U/S.5(1)(B) IN THE HANDS OF THE SHAR EHOLDER ONLY AND NOT IN THE HANDS OF THE PAYEE VIZ., NON-SHAREHOLDER (CONCERN). SEC.5(1)(A) CONTEMPLATES THAT THE RECEIPT OR DEEMED RECEIPT SHOULD BE IN THE NATURE OF INCOME. THEREFORE THE DEEMING FICTION CAN BE APPLIED ONLY IN THE HAND S OF THE SHAREHOLDER AND NOT THE NON-SHAREHOLDER VIZ., THE CONCERN. 37. THE DEFINITION OF DIVIDEND U/S.2(22)(E) OF THE ACT IS AN INCLUSIVE DEFINITION. SUCH INCLUSIVE DEFINITION 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 ORDI NARY 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 LI MITED 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 SUBSTANTIALLY INTERESTED DEEMING THEM AS DIVIDEND IN THE HANDS OF A SHAREHOL DER THE ORDINARY AND NATURAL MEANING OF THE WORD DIVIDEND IS ALTERED. TO THIS EXTENT THE DEFINITION OF THE TERM DIVIDEND CAN BE SAID TO OPERATE. IF TH E 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 SEC.2(22)(E) AND IN THE ABSENCE O F INDICATION IN SEC.2(22)(E) TO EXTEND THE LEGAL FICTION TO A CASE OF LOAN OR ADVAN CE TO A NON-SHAREHOLDER ALSO, WE ARE OF THE VIEW THAT LOAN OR ADVANCE TO A NON-SH AREHOLDER CANNOT BE TAXED AS DEEMED DIVIDEND IN THE HANDS OF A NON-SHAREHOLDER. 7.6. THE AFORESAID VIEW HAS SINCE BEEN APPROVED IN SEVERAL DECISIONS RENDERED BY HONBLE HIGH COURT OF BOMBAY AND DELHI IN THE CASE OF CIT VS. UNIVERSAL MEDICARE PVT. LTD., 324 ITR 263 (BOM) AND CIT VS. ANKITECH P VT.LTD. & OTHERS 340 ITR 14 9 ITA NO.38/KOL/2014 M/S. EAST END SILKS (P)LTD.. A.YR.2010-11 9 (DEL.). SINCE THE ASSESSEE IN THE PRESENT CASE IS NOT A SHAREHOLDER IN THE LENDER COMPANY, WE ARE OF THE VIEW THAT THE ABOVE DECISION IS SQUARELY APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. 7.7. IN VIEW OF THE AFORESAID DECISION, WE ARE OF T HE VIEW THAT THE ORDER OF CIT(A) IS JUST AND PROPER AND CALLS FOR NO INTERFERENCE. WE THEREFORE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE APPEAL BY THE REVENUE. 8. IN THE RESULT THE APPEAL BY THE REVENUE IS DISMI SSED. ORDER PRONOUNCED IN THE COURT ON 10.08.20 16. SD/- SD/- [DR.ARJUN LAL SAINI] [ N.V.VASUD EVAN ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 10.08.2016. [RG PS] COPY OF THE ORDER FORWARDED TO: 1. M/S. EAST END SILKS (P)LTD., 97, PARK STREET, KO LKATA-700016. 2. D.C.I.T., CENTRAL CIRCLE-VIII, KOLKATA. 3. CIT(A)-CENTRAL-I, KOLKATA. 4. CIT, CENTRAL-I , KOLKATA 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER ASSTT.REGISTRAR, ITAT, KOLKATA BENCHES 10 ITA NO.38/KOL/2014 M/S. EAST END SILKS (P)LTD.. A.YR.2010-11 10