M/s. Sonal Industries (P) Ltd., Meerut V. ACIT, Meerut

ITA 4416/DEL/2014

• Counselvise Citation: 441620114 RSA 2014
• Duration Of Justice: 1 year(s) 4 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-12-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Assessment Year: 2009-2010
• Appeal Filed On: 12-08-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHEODAN SINGH BHADORIA
• Assessee Lawyers: RAVINDRA AGGARWAL
• Keywords: Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH ES, NEW DELHI (CIRCUIT BENCH AT MEERUT) BEFORE: SHRII.C . SUDHIR , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI , ACCOUNTANT MEMBER ITA NO. 4416/DEL./2014 ASSTT. YEAR: 2009 - 10 SONAL INDUSTRIES (P) LTD., VS. A.C.I.T., RANGE - 2, CHANDRA BUILDING, GOLA KUAN, MEERUT. MEERUT [PAN:AACCS0048M] (APPELLANT) (RESPONDENT) APPELLANT BY : SH. RAVINDRA AGGARWAL, C.A. RESPONDENT BY : SH.SHEODAN SINGH BHADORIA , SR.DR DATE OF HEARING : 15.12.2015 DAT E OF PRONOUNCEMENT : 22 .12.2015 ORDER PER PRASHANT MAHARISHI , ACCOUNTANT MEMBER: THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A) DATED 14.03.2014, CONFIRMING THE ADDITION OF RS.20 LACS IN THE HANDS OF THE ASSESSEE AS DEEMED DIVIDEND U/S. 2(22)(E) OF THE INCOME - TAX ACT. 2. THE BRIEF FACTS OF THE CASE ARE THAT IN ASSESSMENT U/S. 143(3), IT WAS NOTICED THAT THE ASSESSEE HAS RECEIVED RS.20 LACS FROM M/S. SINGHAL SPINTEX PRIVATE LIMITED. THE AO WAS OF THE VIEW THAT THIS AMOUNT WA S THOUGH ITA NO. 4416/DEL./2014 SONAL INDUSTRIES PRIVATE LIMITED V ACIT CIRCLE - 2 MEERUT A Y 2009 - 10 2 SUBMITTED BY THE ASSESSEE IS FOR TRANSFER OF PLANT AND MACHINERY, BUT IN FACT LOAN GIVEN BY M/S. SINGHAL SPINTEX PRIVATE LIMITED TO THE ASSESSEE AND THEREFORE, AS THE ADVANCE RECEIVED BY THE ASSESSEE COMPANY, HE TREATED THE SAME AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE U/S. 2(22 ) ( E) OF THE IT ACT. THE CIT ( A) SUMMARILY REJECTING THE APPEAL OF THE ASSESSEE, CONFIRMED THE ABOVE ADDITION. 3. BEFORE US, THE LD. AR OF THE APPELLANT SUBMITTED THAT THE ASSESSEE IS NOT A REGISTERED SHAREHOLDER OF M/S. SINGHAL SPINTEX PRIVATE LIMITED AND THEREFORE, DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE CANNOT BE TAXED. FOR THIS, HE PLA C ED ON RECORD LIST OF SHAREHOLDERS OF M/S. SINGHAL SPINTEX PRIVATE LIMITED FOR VARIOUS PERIOD AT PAGE NO. 9 TO 12 OF THE PAPE R B O OK. IT WAS THE MAIN ARGUMENT OF THE AR THAT THE DEEMED DIVIDEND CAN BE TAXED ONLY IN THE HANDS OF THE REGISTERED SHARE HOLDER AND FOR THIS, HE RELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. ANKITECH (P) LTD. AT 340 ITR 14. HE FURTHER SUBMITTED THAT EVEN OTHERWISE, THE ACCUMULATED PROFITS IN THE HANDS OF M/S. SINGHAL SPINTEX PRIVATE LIMITED ARE MUCH LESS THAN THE AMOUNT OF ADVANCE OF RS.20 LACS. THER E FORE HE SUBMITTED THAT AO HAS WRONGLY TAXED DEEMED DIVIDE N D IN THE HANDS OF ASSESSEE IN ABSENCE OF ANY SHARES WHETHER BENEFICIAL OR REGISTERED IN THE NAME OF THE ASSESSEE COMPANY. ITA NO. 4416/DEL./2014 SONAL INDUSTRIES PRIVATE LIMITED V ACIT CIRCLE - 2 MEERUT A Y 2009 - 10 3 4. THE LD. DR SUBMITTED THAT AS ADVANCE IS NOT GIVEN BY M/S. SINGHAL SPINTEX PRIVATE LIMITED TO THE ASSESSEE COMPANY IN THE ORDINARY COURSE OF BUSINES S AND THEREFORE IS RIGHTLY TAX ED IN THE HANDS OF THE ASSESSEE U/S 2(22) ( E) OF THE ACT. FOR THIS, HE RELIED ON THE REASONS GIVEN BY THE AO AT PARA NO. 3 TO 7 OF THE ASSESSMENT ORDER AND HE FURTHER SUBMITTED THAT THERE ARE COMMON SHAREHOLDERS AND THEREFOR E, THE DEEMED DIVIDEND IS CHARGEABLE TO TAX IN THE HANDS OF THE COMPANY. 5. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. IT IS IN DISPUTE THAT THE ASSESSEE HAS RECEIVED LOAN OF RS.20 LACS FROM M/S. SINGHAL SPINTEX PRIVATE LIMITED THOUGH THE ASSESS EE SUBMITTED THAT IT IS IN RELATION TO PLANT AND MACHINERY. WITHOUT GOING INTO THE PURPOSE OF MONEY ADVANCE D , IT IS NECESSARY TO EXAMINE WHETHER DESPITE ASSESSEE NOT BEING A REGISTERED SHAREHOLDER WHETHER DIVIDEND U/S 2 (22) 9E) CAN BE TAXED IN HIS HAND S. HONOURABL ED ELHI HIGH COURT IN CASE OF CIT V ANKITECH PRIVATE LIMITED 340 ITR 14 HAS HELD THAT 21. WE HAVE SERIOUSLY DELIBERATED ON THE AFORESAID ARGUMENTS ADVANCED BY THE COUNSELS FOR THE REVENUE. 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 APPLICABLE. IN CIT V. C.P. SARATHYMUDALIAR [1972] 83 ITR 170 , THE SUPREME COURT HAD TRACED OUT THE ASSESSEE OF THIS PROVISION IN THE FOLLOWING MANNER : ITA NO. 4416/DEL./2014 SONAL INDUSTRIES PRIVATE LIMITED V ACIT CIRCLE - 2 MEERUT A Y 2009 - 10 4 'ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTEREST, OF ANY SUM (W HETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MADE AFTER 31 - 5 - 19987 BY WAY OF ADVANCE OR LOAN. FIRST LIMB ( A )TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFICIAL 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, 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 (HEREAFTER 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 RIG HTLY POINTED OUT BY THE BOMBAY HIGH COURT IN UNIVERSAL MEDICARE (P.) LTD.'S CASE ( SUPRA ) THAT SECTION 2(22)( E ) OF THE 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 COMPANY. (2)IT APPLIES TO ANY SUM PAID BY WAY OF LOAN OR ADVANCE DURING THE YEAR TO THE FOLLOWING PERSONS : ( A )A SHAREHOLDER HOLDING AT LEAST 10 OF VOTING POWER IN THE PAYER COMPANY. ( B )A COMPANY IN WHICH SUCH S HAREHOLDER HAS AT LEAST 20 PER CENT OF THE VOTING POWER. ( C )A CONCERN (OTHER THAN COMPANY) IN WHICH SUCH SHAREHOLDER HAS AT LEAST 20 PER CENT INTEREST. (3)THE PAYER COMPANY HAS ACCUMULATED PROFITS ON THE DATE OF ANY SUCH PAYMENT AND THE PAYMENT IS OUT OF A CCUMULATED PROFITS. (4)THE PAYMENT OF LOAN OR ADVANCE IS NOT IN COURSE OF ORDINARY BUSINESS ACTIVITIES.' 24. THE INTENTION BEHIND ENACTING 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 BECOM E 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 BEH ALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER. IN SUCH AN EVENT, BY THE DEEMING PROVISIONS, SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22)( E ) OF THE ACT IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDERS. 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 LOANS OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO T HE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. 25. FURTHER, IT IS AN ADMITTED CASE THAT UNDER NORMAL CIRCUMSTANCES, SUCH A LOAN OR ADVANCE GIVEN TO THE SHAREHOLDERS OR TO A CONCERN, WOULD NOT QUALIFY AS DIVIDEND. IT HAS BEEN MADE SO BY LEGAL FI CTION CREATED UNDER SECTION 2(22)( E ) OF THE ACT. WE HAVE TO KEEP IN MIND THAT THIS LEGAL PROVISION RELATES TO 'DIVIDEND'. THUS, BY A DEEMING PROVISION, IT IS THE DEFINITION OF DIVIDEND WHICH IS ENLARGED. LEGAL FICTION DOES NOT EXTEND TO 'SHAREHOLDER'. WHEN WE KEEP IN MIND THIS ASPECT, THE CONCLUSION WOULD BE OBVIOUS, VIZ., LOAN OR ADVANCE GIVEN UNDER THE CONDITIONS ITA NO. 4416/DEL./2014 SONAL INDUSTRIES PRIVATE LIMITED V ACIT CIRCLE - 2 MEERUT A Y 2009 - 10 5 SPECIFIED UNDER SECTION 2(22)( E ) OF THE ACT WOULD ALSO BE TREATED AS 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 IN THE FORM OF DIVIDEND TO ITS SHAREHOLDERS/MEMBERS AND SUCH DIVIDEND CANNOT BE GIVEN TO NON - MEMBERS. THE SECOND CAT EGORY SPECIFIED UNDER SECTION 2(22)( E ) OF THE ACT, VIZ., A CONCERN (LIKE THE ASSESSEE HEREIN), WHICH IS GIVEN THE LOAN OR ADVANCE IS ADMITTEDLY NOT A SHAREHOLDER/MEMBER OF THE PAYER COMPANY. THEREFORE, UNDER NO CIRCUMSTANCE, IT COULD BE TREATED AS SHAREHOLDER/MEMBER RECEIVING DIVIDEND. IF THE INTENTION OF THE L EGISLATURE WAS TO TAX SUCH LOAN OR ADVANCE AS DEEMED DIVIDEND AT THE HANDS OF 'DEEMING SHAREHOLDER', THEN THE LEGISLATURE WOULD HAVE INSERTED DEEMING PROVISION IN RESPECT OF SHAREHOLDER AS WELL, THAT HAS NOT HAPPENED. MOST OF THE ARGUMENTS OF THE LEARNED C OUNSELS FOR THE REVENUE WOULD STAND ANSWERED, ONCE WE LOOK INTO THE MATTER FROM THIS PERSPECTIVE. 26. IN A CASE LIKE THIS, THE RECIPIENT WOULD BE A SHAREHOLDER 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 SCHEME OF THE ACT AS PROJECTED BY THE LEARNED COUNSELS FOR THE REVENUE ON THE BASIS OF SECTIONS 4, 5, 8, 14 AND 56 OF THE ACT WOULD BE OF NO AVAI L. 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 RECIPIENT TO THE COMPANY, WHICH HAS GIVEN THE LOAN OR ADVANCE. 27. PRECISELY, FOR THIS VERY REASON, THE C OURTS HAVE HELD THAT IF THE AMOUNTS ADVANCED ARE FOR BUSINESS TRANSACTIONS BETWEEN THE PARTIES, SUCH PAYMENT WOULD NOT FALL WITHIN THE DEEMING DIVIDEND UNDER SECTION 2(22)( E ) OF THE ACT. 28. INSOFAR AS RELIANCE UPON CIRCULAR NO. 495, DATED 22 - 9 - 1997 ISSUED BY CENTRAL BOARD OF DIRECT TAXES IS CONCERNED, WE ARE INCLINED TO AGREE WITH THE OBSERVATIONS OF THE MUMBAI BENCH DECISION IN BHAUMIK COLOUR (P.) LTD.'S CASE ( SUPRA ) THAT SUCH OBSERVATIONS ARE NOT BINDING ON THE COURTS. ONCE IT IS FOUND THAT SUCH LOAN OR ADVANCE CANNOT BE TREATED AS DEEMED DIVIDEND AT THE HANDS OF SUCH A CONCERN WHICH IS NOT A SHAREHOLDER, AND THAT ACCORDING TO US IS THE CORRECT LEGAL POSITION, SUCH A CIRCULAR WOULD BE OF NO AVAIL. IN VIEW OF THE DECISION OF HONOURABLE DELHI HIGH COURT IN CASE OF CIT V ANKITECH PRIVATE LIMITED (SUPRA) FOR THE PURPOSE OF TAXING ANY SUM IN THE HANDS OF THE ASSESSEE AS LOAN RECEIVED FROM ANY OTHER COMPANY, IT IS NECESSARY THAT THE ASSESSEE SHOULD BE A REGISTERED AND BENEFICIAL SHAREHOLDER IN THE LENDER COMP ANY HOLDING SUBSTANTIAL INTEREST . IN THIS CASE, WE HAVE PERUSED THE LIST OF SHAREHOLDERS IN THE HANDS OF M/S. SINGHAL SPINTEX PRIVATE LIMITED AND COULD NOT FIND THAT ANY SHARES ARE REGISTERED IN THE NAME OF ASSESSEE ITA NO. 4416/DEL./2014 SONAL INDUSTRIES PRIVATE LIMITED V ACIT CIRCLE - 2 MEERUT A Y 2009 - 10 6 COMPANY . IN THIS CASE, WE DO NOT FIND T HAT THE ASSESSEE IS A SHAREHOLDER IN M/S. SINGHAL SPINTEX PRIVATE LIMITED AND THEREFORE, THE SUM OF RS.20 LACS RECEIVED BY THEASSESSEE DO NOT SATISFY THE CONDITIONS OF DEEMED DIVIDEND AS PROVIDED U/S. 2(22)(E) OF THE IT ACT. IN VIEW OF THIS, WE REVERSE THE ORDER OF THE CIT ( A) AND DELETE THE ADDITION OF RS.20 LACS U/S. 2(22 ) ( E) OF THE IT ACT. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22.12.2015. - SD/ - - SD/ - ( I.C. SUDHIR ) ( PRASHANT MAHARISHI ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 22.12.2015 *AKS/ - COPY OF ORDER FORWARDED TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT ( A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT. REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI