Business Strategy Group, New Delhi V. ACIT, New Delhi

ITA 4080/DEL/2011

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 3421 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 7 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 30-03-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 07-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K JAIN
• Assessee Lawyers: SANDEEP SINGLA
• Keywords: Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: A NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER & SHRI K.N. CHARRY, JUDICIAL MEMBER ITA NO.-4080/DEL/2011 ( ASSESSMENT YEAR: 2006-07) BUSINESS STRATEGY GROUP B-9, BASEMENT, NEAR GYAN BHARTI SCHOOL, SAKET, NEW DELHI. AAAFB5289N VS ACIT CIRCLE 23(1) NEW DELHI. ASSESSEE BY SH. SANDEEP SINGLA, CA REVENUE BY SH. S.K. JAIN, DR ORDER PER K. NARSIMHA CHARRY, J.M. THIS IS AN APPEAL BY THE ASSESSEE CHALLENGING THE O RDER DATED 29.06.2011 IN APPEAL NO. 156/2008-09 BY THE COMMISS IONER OF INCOME TAX (APPEALS)-XXII, NEW DELHI. 2. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IS A FIRM DERIVING ITS INCOME FROM MANAGEMENT CONSULTANCY SERVICES. ONE S MT. NEETA MOHLA IS A PARTNER OF THE ASSESSEE FIRM WITH 50% SH ARE THEREIN AND DATE OF HEARING 30.03.2017 DATE OF PRONOUNCEMENT 21.04.2017 2 ITA NO. 4080/DEL/2011 ONE SHRI DEEPAK MOHLA IS HAVING THE OTHER 50% OF TH E SAME. THOSE TWO PERSONS ARE EQUAL SHAREHOLDERS IN ONE M/S TMI ASSOCIATES (P) LTD. IN WHICH THE PUBLIC ARE NOT SUB SEQUENTLY INTERESTED. FOR THE AY 2006-07 THE ASSESSEE FIRM F ILED THE RETURN OF INCOME ON 31.10.2006 DECLARING A TOTAL INCOME OF RS. 10,97,233/-. DURING THE COURSE OF ASSESSMENT PROCE EDINGS, THE AO FOUND THAT THE ASSESSEE FIRM HAD SHOWN A LOAN OF RS. 3 LAKHS FROM M/S TMI ASSOCIATES PVT. LTD. AND THE ACCUMULAT ED RESERVES OF M/S TMI ASSOCIATES P. LTD. WAS RS. 43,89,616/- AS P ER ITS BALANCE SHEET AS ON 31.03.2006. AFTER AFFORDING AN OPPORTU NITY OF BEING HEARD TO THE ASSESSEE, THE AO TREATED SUCH LOAN AMO UNT OF RS. 3 LACS AS DEEMED DIVIDEND U/S 2(22)(E). ASSESSEE CHA LLENGED THE SAME BEFORE THE LD. CIT (A) AND THE LD. CIT (A) BY THE IMPUGNED ORDER DISMISSED THE GROUND RELATING TO THIS ISSUE O F DEEMED DIVIDEND AND CONFIRMED THE SAME. THE ASSESSEE IS T HEREFORE, BEFORE US IN THIS APPEAL CHALLENGING THE IMPUGNED O RDER STATING THAT THE LD. CIT (A) FAILED TO APPRECIATE THAT SECT ION 2(22)(E) HAS NO APPLICATION TO THE AMOUNTS RECEIVED FROM A COMPANY BY THE NON SHAREHOLDER, AND IN AS MUCH AS THE ASSESSEE FIRM IS NOT A SHAREHOLDER IN THE TMI ASSOCIATES P. LTD. THE SAID LOAN CANNOT BE 3 ITA NO. 4080/DEL/2011 ASSESSED TO TAX IN THE HANDS OF THE ASSESSEE. HE F URTHER SUBMITTED THAT SMT. NEETA MOHLA NEVER WITHDREW ANY AMOUNT FRO M THE PARTNERSHIP FIRM. PER CONTRA LD. DR VEHEMENTLY REL IED UPON THE ORDERS OF THE AUTHORITIES BELOW. 3. AT THE OUTSET IT MUST BE STATED THAT ONE NEETA M OHLA AND DEEPAK MOHLA ARE PARTNERS WITH 50% SHARE TO EACH IN ASSESSEE FIRM AND THEY ARE THE EQUAL SHAREHOLDERS IN TMI ASS OCIATES P. LTD. ONLY THE PERSONS ARE COMMON IN BOTH THE ENTITIES BU T THE ASSESSEE FIRM IS ADMITTEDLY NOT A SHAREHOLDER OF THE TMI ASS OCIATES P. LTD. ON THE ASPECT OF THE TAXABILITY OF THE LOAN OBTAINE D BY THE ASSESSEE FIRM FROM THE PRIVATE LIMITED COMPANY, IN THE HANDS OF THE ASSESSEE FIRM, THE RATIO LAID DOWN IN ASSISTANT COM MISSIONER OF INCOME TAX VS. BHAUMIK COLOUR (P) LTD.118 ITD 00 01 IS APPLICABLE ON ALL FORCE. IT IS HELD IN THE SAID DE CISION AS FOLLOWS: 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. 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 PROVISIONS OF S. 4 ITA NO. 4080/DEL/2011 2(22)(E). THE INTENTION BEHIND ENACTING PROVISIONS OF S. 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 PROFI T AS DIVIDEND BECAUSE IF SO DISTRIBUTED THE DIVIDEND INCOME WOULD BECOME TAXABLE IN THE HANDS OF THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED PROFITS 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 AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF S. 2(22)(E) IS TO TAX DIVI DEND IN THE HANDS OF SHAREHOLDER. THE DEEMING PROVISION 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 LEGISLATU RE IS THEREFORE TO TAX DIVIDEND ONLY IN THE HANDS OF T HE SHAREHOLDER AND NOT IN THE HANDS OF THE CONCERN. TH E BASIS OF BRINGING IN THE AMENDMENT TO S. 2(22)(E) B Y THE FINANCE ACT, 1987, W.E.F 1ST APRIL, 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 CONCE RN 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 5 ITA NO. 4080/DEL/2011 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 INCOM E. IN OTHER WORDS THERE IS A DEEMED ACCRUAL OF INCOME EVEN UNDER S. 5(1)(B) IN THE HANDS OF THE SHAREHOLD ER ONLY AND NOT IN THE HANDS OF THE PAYEE VIZ., NON- SHAREHOLDER (CONCERN). SEC. 5(1)(A) CONTEMPLATES TH AT THE RECEIPT OR DEEMED RECEIPT SHOULD BE IN THE NATU RE OF INCOME. THEREFORE, THE DEEMING FICTION CAN BE APPLIED ONLY IN THE HANDS OF THE SHAREHOLDER AND NO T THE NON-SHAREHOLDER VIZ., THE CONCERN. CBDT CIRCULA R NO. 495, DT. 22ND SEPT., 1987, TO THE EXTENT NOT BENEVOLENT IS NOT BINDING. 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 CONCERN THEN, THE BENEFIT OF SET OFF A S PER S. 2(22)(E)(III) CANNOT BE ALLOWED TO THE CONCE RN, BECAUSE THE CONCERN CAN NEVER RECEIVE DIVIDEND FROM THE COMPANY WHICH IS ONLY PAID TO THE SHAREHOLDER, WHO HAS SUBSTANTIAL INTEREST IN THE CONCERN. THE PROVISIONS OF SUB-CL. (III) OF S. 2(22)(E) ALSO THE REFORE CONTEMPLATE DEEMED DIVIDEND BEING TAXED IN THE HANDS OF A SHAREHOLDER ONLY. 4. RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE HO LD THAT SO LONG AS THE ASSESSEE FIRM IS NOT A SHAREHOLDER, ANY LOAN OBTAINED BY THE ASSESSEE FIRM FROM THE PRIVATE LIMITED COMPA NY, WHEREIN THE PARTNERS OF THE ASSESSEE FIRM ARE THE SHAREHOLD ERS, IS NOT TAXABLE IN THE HANDS OF THE ASSESSEE. WE, THEREFOR E, FIND THAT THE ORDERS OF THE AUTHORITIES BELOW CANNOT BE SUSTAINED AND THE APPEAL HAS TO BE ALLOWED DELETING THE ADDITION MADE BY THE AO TREATING THE LOAN AS A DEEMED DIVIDEND U/S 2(22)(E) OF THE A CT. 6 ITA NO. 4080/DEL/2011 5. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21.04.2017 SD/- SD/- (S.V. MEHROTRA) (K. NARSIMHA CHARRY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 21.04.2017 *KAVITA ARORA COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT TRUE COPY ASSISTANT REGISTRAR ITAT NEW DELHI DRAFT DICTATED ON 20.04.2017 DRAFT PLACED BEFORE AUTHOR 20.04.2017 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. APPROVED DRAFT COMES TO THE SR.PS/PS 21.04.2017 KEPT FOR PRONOUNCEMENT ON 21.04.2017 FILE SENT TO THE BENCH CLERK 21.04.2017 DATE ON WHICH FILE GOES TO THE AR DATE ON WHICH FILE GOES TO THE HEAD CLERK. DATE OF DISPATCH OF ORDER.