ADDL CIT RG 8(2), MUMBAI V. MITTATEX EXPORTS P. LTGD, MUMBAI

ITA 5203/MUM/2010

• Counselvise Citation: 520319914 RSA 2010
• Duration Of Justice: 1 year(s) 6 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-12-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 25-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 24-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P C MAURYA
• Keywords: Question of law; Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH B, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI PRAMOD KUMAR (A.M) ITA NO.5203/MUM/2010(A.Y. 2006-07) THE DCIT 8(2), ROOM NO.216A OR 209, 2 ND FLOOR, AAYKAR BHAVAN, MK ROAD, MUMBAI 21. (APPELLANT) VS. M/S. MITTATEX EXPORTS PVT. LTD., 4, CROSSGATE, LOKHANDWALA COMPLEX, ANDHERI (W), MUMBAI 400 053. PAN: AAACM 2803J (RESPONDENT) APPELLANT BY : SHRI P.C.MAURYA RESPONDENT BY : NONE DATE OF HEARING : 26/12/2011 DATE OF PRONOUNCEMENT : 30/12 /2011 ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDE R DT. 22.3.2010 O CIT(A)-17, MUMBAI, RELATING TO AY 06-07. THE GROUN D OF APPEAL RAISED BY THE REVENUE READS AS FOLLOWS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 5,81, 101/- U/S. 2(22)(E) OF THE IT ACT 1961 WITHOUT APPRECIATING THE FACT OF T HE CASE AND WITHOUT APPRECIATING THE FINDING OF THE AO THAT THE PROVISI ONS OF SEC. 2(22)(E) ARE APPLICABLE IN THE CASE OF THE ASSESSEE COMPANY. 2. THE ASSESSEE IS A COMPANY. IT CARRIES ON BUSINE SS AS MERCHANT EXPORTER, IMPORTER AND TRADER. DURING THE PREVIOUS YEAR THE ASSESSEE RECEIVED LOAN OF RS.34,50,000 AND RS.58,25,000 RES PECTIVELY FROM M/S.K.K.M.INTERNATIONAL PVT.LTD. AND EUROFLAX INDUS TRIES LTD. AND THESE COMPANIES HAD RESERVES AND SURPLUS OF RS.9,03,664/- AND RS.23,90,184/- ITA NO.5203/MUM/2010(A.Y. 2006-07) 2 RESPECTIVELY. THE SHAREHOLDING PATTERN OF THE ASSE SSEE AND THE TWO OTHER COMPANIES FROM WHOM THE ASSESSEE RECEIVED LOANS REF ERRED TO ABOVE WERE AS FOLLOWS: SHAREHOLDERS MITTATEX EXPORTS PVT. LTD.(MEPL) EUROFLAX INDUSTRIES LTD. (EIL) KKM INTERNATIONAL PVT. LTD. (KIPL) MISS SWATI K. MITTAL 10,000 20.00% 30,100 20.06% 2,000 20% ANJU K. MITTAL 5,000 10.00% 14,700 9.80% 1,000 10% ASHISH K. MITTAL 4,800 9.60% 14,700 9.80% 800 8% KRISHNA KUMAR MITTAL 10,100 20.20% 100 20.06% 2,100 21% KRISHNA KUMAR MITTAL HUF 10,000 20.00% 30,100 20.07% 2,000 20% MRS. UMA K.MITTAL 10,100 20.20% 30,000 20.00% 2,000 20% MRS. PRITI H. BAPNA 100 0.06% SHARAD JIWARAJKA 100 0.06% HARSHA BAPNA 100 0.06% TOTAL 50,000 100% 1,50,000 100% 10,000 100% FROM THE ABOVE TABLE THE AO FOUND THAT MISS. SWATI K.MITTAL, KRISHNA KUMAR MITTAL (HUF) AND MRS.UMA K.MITTAL HELD SUBSTANTIAL SHARES IN ALL THE THREE COMPANIES. THE AO WAS OF THE VIEW THAT THE PROVISI ONS OF SEC.22(22)(E) OF THE INCOME TAX ACT, 1961 (THE ACT) WERE ATTRACTED. THE PROVISIONS OF SEC.2(22)(E) OF THE ACT, READS AS FOLLOWS: ( E ) 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) MADE AFTER THE 31-5-1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARE S (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 P ER 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 CLAUSE REFERRED TO AS THE SAID CONCERN) OR ANY PAYM ENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, O F ANY SUCH ITA NO.5203/MUM/2010(A.Y. 2006-07) 3 SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY 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 INTE REST IN A CONCERN, OTHER THAN A COMPANY, IF HE IS, AT ANY TIM E DURING THE PREVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LESS TH AN TWENTY PERCENT OF THE INCOME OF SUCH CONCERN; SECTION 2(32) DEFINES THE EXPRESSION PERSON WHO HA S A SUBSTANTIAL INTEREST IN THE COMPANY, IN RELATION TO A COMPANY, MEANS A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES, NOT BEING SH ARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RI GHT TO PARTICIPATE IN PROFITS, CARRYING NOT LESS THAN TWENTY PERCENT OF T HE VOTING POWER. 3. AN ANALYSIS OF THE ABOVE PROVISIONS SHOWS THAT T HERE ARE THREE LIMBS TO SEC.2(22)(E) WHICH ARE AS FOLLOWS: ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WH ICH 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 FIRST LIMB (A) TO A SHAREHOLDER, BEING A PERSON 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 P ROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER, SECOND LIMB (B) OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A ME MBER 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 FO R THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, ITA NO.5203/MUM/2010(A.Y. 2006-07) 4 TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE P OSSESSES ACCUMULATED PROFITS. 4. IN THE PRESENT APPEAL WE ARE CONCERNED WITH THE SECOND LIMB OF SEC.2(22)(E) OF THE ACT, VIZ., TO ANY CONCERN IN W HICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTI AL INTEREST. THE FOLLOWING CONDITIONS ARE REQUIRED TO BE SATISFIED F OR APPLICATION OF THE ABOVE CATEGORY OF PAYMENT TO BE REGARDED AS DIVIDEND. TH EY ARE: (A) THERE MUST BE A PAYMENT TO A CONCERN BY A COMPANY. (B) A PERSON MUST BE SHAREHOLDER OF THE COMPANY BEING A REGISTERED HOLDER AND BENEFICIAL OWNER OF SHARES (NOT BEING SH ARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RI GHT TO PARTICIPATE IN PROFITS) 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 SHAR EHOLDER REFERRED TO IN THE EARLIER PART OF SEC.2(22)(E) VIZ., A REGISTERED AND A BENEFICIAL HOLDER OF SHARES HOLDING 10% VOTING POWER. (C) THE VERY SAME PERSON REFERRED TO IN (B) ABOVE MUST ALSO BE A MEMBER OR A PARTNER IN THE CONCERN HOLDING SUBSTANTIAL INT EREST IN THE CONCERN VIZ., WHEN THE CONCERN IS NOT A COMPANY, HE MUST AT ANY TIME DURING THE PREVIOUS YEAR, BE BENEFICIALLY ENTITLED TO NOT LESS THAN TWENTY PERCENT OF THE INCOME OF SUCH CONCERN; AND WHERE TH E CONCERN IS A COMPANY HE MUST BE THE OWNER OF SHARES, NOT BEING S HARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS, CARRYING NOT LESS THAN TWENTY PERCENT O F THE VOTING POWER (D) IF THE ABOVE CONDITIONS ARE SATISFIED THEN THE PAYM ENT BY THE COMPANY TO THE CONCERN WILL BE DIVIDEND. 5. ACCORDING TO THE AO , THE CONDITIONS MENTIONED IN THE SECOND LIMB OF SEC.2(22)(E) OF THE ACT WERE FULFILLED. THEREAFTE R THE AO MADE AN ADDITION OF RS.5,81,101/- AS DEEMED DIVIDEND OBSERVING AS FOLLO WS: 4.2.9 FROM THE ABOVE DISCUSSION, IT IS CLEAR THAT THE ASSESSEE HAS RECEIVED PAYMENTS, WHICH ARE COVERED BY THE DEEMING PROVISIONS OF SECTION 2(22)(E) OF THE I.T. ACT, 1961. SINCE THE L OANS RECEIVED ARE MORE THAN THE ACCUMULATED PROFITS OF THE GROUP COMPANY E XTENDING SUCH ITA NO.5203/MUM/2010(A.Y. 2006-07) 5 LOAN, THE AMOUNT OF DEEMED DIVIDEND IS RESTRICTED T O THE EXTENT OF THE RESERVES AND SURPLUS OF THE RESPECTIVE COMPANIES AS UNDER: DEEMED DIVIDEND FROM EUROFLAX INDUSTRIES LTD. ... RS.23,90,184 DEEMED DIVIDEND FROM KKM INTERNATIONAL PVT. LTD. ... RS. 9,03,664 HOWEVER, IN THE A.Y: 2005-06, THE ASSESSING OFFICER HAS ALREADY TAXED THE RESERVES & SURPLUS OF THE ABOVE COMPANIES AS DE EMED DIVIDEND IN THE HANDS OF THE ASSESSEE COMPANY. DEEMED DIVIDEND FROM EUROFLAX INDUSTRIES LTD. ... RS.21,88,897 DEEMED DIVIDEND FROM KKM INTERNATIONAL PVT. LTD. ... RS. 5,23,850 THEREFORE, THE AMOUNT IN EXCESS OF RESERVES & SURPL US FOR THE YEAR ENDED 31.03.2005 ARE HEREBY HELD AS INCOME FROM OT HER SOURCES AND TAXED AS DEEMED DIVIDENDS U/S.2(22)(E) R.W.S. 56 OF THE INCOME TAX ACT, 1961. DEEMED DIVIDEND FROM EUROFLAX INDUSTRIES LTD. ... RS.2,01,287 DEEMED DIVIDEND FROM KKM INTERNATIONAL PVT. LTD. ..: RS.3,79,814 RS.5,8 1,101/ 6. ON APPEAL BY THE ASSESSEE, THE CIT(A) DELETED TH E ADDITION MADE BY THE AO BY FOLLOWING THE DECISION OF CIT(A) IN ASSE SSEES OWN CASE FOR AY 05- 06 WHEREBY THE CIT(A) HAD FOLLOWED THE DECISION OF THE ITAT SPECIAL BENCH, MUMBAI IN THE CASE OF M/S.BHAUMIK COLOUR PVT.LTD. I TA NO.5030/MUM/04 ORDER DT. 19.11.2008 AND DELETED THE ADDITION MADE ON ACCOUNT OF DEEMED DIVIDEND. AGGRIEVED BY THE ORDER OF THE CIT(A), TH E REVENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 7. WE HAVE HEARD THE SUBMISSION OF THE LEARNED D.R. WHO SUBMITTED THAT IN AY 05-06 ALSO THE TRIBUNAL HAD DISMISSED THE APP EAL OF THE REVENUE AGAINST THE ORDER OF CIT(A) DELETING THE ADDITION M ADE ON ACCOUNT OF DEEMED DIVIDEND. HE HOWEVER RELIED ON THE ORDER OF THE AO . 8. WE HAVE CONSIDERED HIS SUBMISSION AND ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) DOES NOT CALL FOR ANY INTERFERENCE. THE SPECIAL BENCH OF ITAT, ITA NO.5203/MUM/2010(A.Y. 2006-07) 6 MUMBAI, IN THE CASE OF BHAUMIK COLOR LABS ITA 5030/ M/04, 118 ITD 1 (SB) (MUM), CONSIDERED THE QUESTION WHETHER DEEMED DIVID END U/S. 2(22)(E) OF THE INCOME TAX ACT, 1961 CAN BE ASSESSED IN THE HAN DS OF A PERSON OTHER THAN A SHAREHOLDER OF THE LENDER ? THE SPECIAL BEN CH HELD THAT DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HANDS OF A PER SON WHO IS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PER SON OTHER THAN A SHAREHOLDER. 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 PAY MENT WHICH WAS TO BE CONSIDERED AS DIVIDEND AS INTRODUCED BY THE FINA NCE ACT 1987 W.E.F.1-4-88 VIZ., PAYMENT BY A COMPANY TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WH ICH 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 T HE 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 ORDER. 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 FIRM. THIS FIRM RECEIVED AN ADVANCE OF RS.10 LACS FROM A COMPANY M/S.HILLTOP PALACE HOTESLS (P) LTD. THE SHAREHOLDI NG 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% 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 BE CAUSE THE TWO PARTNERS OF M/S.HOTEL HILL TOP WERE HOLDING SHARES BY WHICH THEY HAD ITA NO.5203/MUM/2010(A.Y. 2006-07) 7 10% VOTING POWER IN M/S.HILL TOP PALACE HOTESL (P) LTD. THEY WERE ALSO ENTITLED TO 20% OF THE 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 DEEMED DIVIDEND IN THE HAND S 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 SHAREHO LDER OF THE COMPANY THE ASSESSMENT AS DEEMED DIVIDEND IN THE HANDS OF T HE FIRM 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 LAW WAS FRAMED FOR CONSIDERATION. 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 LEARNED CIT(A) DELETING THE ADDITION OF RS.10 LACS AS DEEME D DIVIDEND UNDER SECTION 2(22)(E) OF THE IT ACT? THE HONBLE COURT HELD AS FOLLOWS: THE IMPORTANT ASPECT, BEING THE REQUIREMENT OF SEC TION 2(22)(E) IS, THAT THE PAYMENT MAY BE MADE TO ANY C ONCERN, IN WHICH SUCH SHAREHOLDER IS A MEMBER, OR THE PARTNER, AND IN WHICH HE HAS SUBSTANTIAL INTEREST, OR ANY PAYMENT B Y ANY SUCH COMPANY, ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER . THUS, THE SUBSTANCE OF THE REQUIR EMENT IS THAT THE PAYMENT SHOULD BE MADE ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER, OBVIOUS LY, THE PROVISION IS INTENDED TO ATTRACT THE LIABILITY OF T AX ON THE PERSON, ON WHOSE BEHALF, OR FOR WHOSE INDIVIDUAL BENEFIT, T HE AMOUNT IS PAD BY THE COMPANY, WHETHER TO THE SHAREHOLDER, OR TO THE CONCERNED FIRM. IN WHICH EVENT, IT WOULD FALL WITHI N THE EXPRESSION DEEMED DIVIDEND. OBVIOUSLY, INCOME FRO M DIVIDEND, IS TAXABLE AS INCOME FROM THE OTHER SOURCES UNDER S ECTION 56, AND IN THE VERY NATURE OF THINGS THE INCOME HAS TO BE OF THE PERSON EARNING THE INCOME. THE ASSESSEE IN THE PRES ENT CASE IS NOT SHOWN TO BE ONE OF THE PERSONS, BEING SHAREHOLD ER. OF COURSE, THE TWO INDIVIDUALS BEING R AND D. ARE THE COMMON PERSONS, HOLDING MORE THAN REQUISITE AMOUNT OF SHAR EHOLDING AND ARE HAVING REQUISITE INTEREST, IN THE FIRM, BUT THEN, THEREBY THE DEEMED DIVIDEND WOULD NOT BE DEEMED DIVIDEND IN THE HANDS OF THE FIRM, RATHER IT WOULD OBVIOUSLY BE DEEMED DI VIDEND IN THE HANDS OF THE INDIVIDUALS, ON WHOSE BEHALF, OR ON WH OSE INDIVIDUAL BENEFIT, BEING SUCH SHAREHOLDER, THE AMO UNT IS PAID BY THE COMPANY TO THE CONCERN. THUS, THE SIGNIFICAN T REQUIREMENT OF SECTION 2(22)(E) IS NOT SHOWN TO EXI ST. THE LIABILITY OF TAX, AS DEEMED DIVIDED, COULD BE ATTRACTED IN TH E HANDS OF THE INDIVIDUALS, BEING THE SHAREHOLDERS, AND NOT IN THE HANDS OF THE FIRM. ITA NO.5203/MUM/2010(A.Y. 2006-07) 8 32. THE AFORESAID DECISION OF THE HONBLE RAJASTHA N HIGH COURT WHICH IS THE ONLY DECISION OF HIGH COURT, SHOULD BE SUFFI CIENT TO ANSWER QUESTION NO.2 WHICH HAS BEEN REFERRED TO THE SPECIA L BENCH BY HOLDING THAT DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HA NDS OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER. THE ARGUMENT OF T HE LEARNED D.R. THAT THE HONBLE RAJASTHAN HIGH COURT DID NOT DEAL WITH THE SECOND LIMB OF SEC.2(22)(E) OF THE ACT IS NOT CORRECT. 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 P ROVISIONS ARE AMBIGUOUS. IT IS THEREFORE NECESSARY TO EXAMINE TH E 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 WHIC H PUBLIC ARE NOT SUBSTANTIALLY INTERESTED), WHICH ARE CONTROLLED BY A GROUP OF MEMBERS, EVEN THOUGH THE COMPANY HAS ACCUMULATED PROFITS WOU LD NOT DISTRIBUTE SUCH PROFIT AS DIVIDEND BECAUSE IF SO DI STRIBUTED THE DIVIDEND INCOME WOULD BECAME TAXABLE IN THE HANDS O F THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED P ROFITS AS DIVIDEND, COMPANIES DISTRIBUTE THEM AS LOAN OR ADVANCES TO SH AREHOLDERS OR TO CONCERN IN WHICH SUCH SHAREHOLDERS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT ON BEHALF OF OR FOR THE INDIVIDUAL BENE FIT OF SUCH SHAREHOLDER. IN SUCH AN EVENT, BY THE DEEMING PROVI SIONS SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22)(E) IS TO TAX DIVIDE ND 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 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 INTENTI ON OF THE LEGISLATURE IS THEREFORE TO TAX DIVIDEND ONLY IN TH E HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF THE 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 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 ITA NO.5203/MUM/2010(A.Y. 2006-07) 9 CAN CONTROL THE AFFAIRS OF THE CONCERN CAN DRAWN TH E SAME FROM THE CONCERN INSTEAD OF THE COMPANY DIRECTLY MAKING PAYM ENT TO THE SHAREHOLDER AS DIVIDEND. THE SOURCE OF POWER TO CO NTROL THE AFFAIRS OF THE COMPANY AND THE CONCERN IS THE BASIS ON WHICH T HESE 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 INCOM E. IN OTHER WORDS THERE IS A DEEMED ACCRUAL OF INCOME EVEN U/S.5(1)(B ) IN THE HANDS OF THE SHAREHOLDER ONLY AND NOT IN THE HANDS OF THE PA YEE VIZ., NON- SHAREHOLDER (CONCERN). SEC.5(1)(A) CONTEMPLATES TH AT THE RECEIPT OR DEEMED RECEIPT SHOULD BE IN THE NATURE OF INCOME. THEREFORE THE DEEMING FICTION CAN BE APPLIED ONLY IN THE HANDS 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 THE TERM DIVIDEND ACCORDING TO ITS ORDINARY AND NATURAL ME ANING 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 SHA RE 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 SUBSTANTIALLY INTERESTED DEEMING THEM AS DIVIDEND IN THE HANDS OF A SHAREHOLDER THE ORDINARY AND NATURAL MEANING OF THE WORD DIVID END IS ALTERED. TO THIS EXTENT THE DEFINITION OF THE TERM DIVIDEND CA N BE SAID TO OPERATE. IF THE DEFINITION OF DIVIDEND IS EXTENDED TO A LO AN 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 T HE PROVISIONS OF SEC.2(22)(E) AND IN THE ABSENCE OF INDICATION IN SE C.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-SH AREHOLDER CANNOT BE TAXED AS DEEMED DIVIDEND IN THE HANDS OF A NON-SHAR EHOLDER. ITA NO.5203/MUM/2010(A.Y. 2006-07) 10 SINCE THE ASSESSEE IN THE PRESENT CASE IS NOT A SHA REHOLDER IN THE LENDER COMPANY, WE ARE OF THE VIEW THAT THE ABOVE DECISION IS SQUARELY APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. CONSEQUENTLY, TH E APPEAL BY THE REVENUE IS DISMISSED. 9. IN THE RESULT, THE APPEAL BY THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 30 TH DAY OF DEC. 2011. SD/- SD/- (PRAMOD KUMAR ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 30 TH DEC.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RB BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.5203/MUM/2010(A.Y. 2006-07) 11 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 27/12/2011 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 27/12/2011 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPRO VED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER