2019 (11) TMI 1142 - HC - Income Tax

Maintainability of writ petition against order of Settlement Commission s order - Acceptance of order in part and part in piecemeal challenge - Scope of Deemed Dividend where transactions entered are in the nature of commercial transactions - loan/advances is made by a company to concern with common shareholder - current account transactionsin the normal/ordinary course of business - Benefit of exemption u/s 10(34) - HELD THAT - Impugned order of the Commission is not in conformity with the provisions of the Act and by applying the ratio laid down in Jyotendrasinhji s case 1993 (4) TMI 1 - SUPREME COURT it can be said that the present Writ Petition is maintainable. Likewise, this is not a case where the petitioner had accepted a portion of the impugned order and challenged the rest. As stated earlier, the petitioner offered the income of ₹ 35 lakhs seized as additional income for the assessment year 2013-2014 and also disclosed that the said income was derived out of the sale of Silver Oak trees which were felled at her agricultural lands. The application for settlement was made since the petitioner was not able to prove that the seized cash was out of the sale of such trees. Apprehending that the amounts advanced by RSPL to RTPL may be assessed as deemed dividend is in the hands of the petitioner, a mention was made in the application that the petitioner is a shareholder, holding more than 20% of equity share capital in both the Companies and that RSPL had advanced the money in the ordinary course of its business as corporate loans to RTPL. It is nobody s case that the petitioner claimed a portion of the sum of ₹ 35 lakhs offered as income, to be taxable. Hence the contention of Department that a piecemeal challenge to the Settlement Commission s order is not maintainable, cannot be sustained. As such, this Court is of the view that the challenge to the impugned order of the Settlement Commission by invoking Article 226 of the Constitution of India in this Writ Petition, is maintainable. Relevance and validity of CBDT Circulars - whether the Circulars of the CBDT are binding on the Settlement Commission and if so, whether the contents of these two Circulars would allure to the benefit of the petitioner? - Addition u/s 2(22)(e) - HELD THAT - Circular was issued on the basis of various judicial precedents, which has been referred to in the Circular itself. References were made in the said Circular to Creative Dyeing and Printing Private Limited 2009 (9) TMI 43 - DELHI HIGH COURT wherein it was held that amounts advanced for business transactions do not fall within the definition of deemed dividend under Section 2 (22) (e) of the Act. Likewise, the CBDT Circular had placed reliance on the decisions in CIT V. Amrik Singh, 2015 (4) TMI 1174 - PUNJAB AND HARYANA HIGH COURT and CIT, Agra V. Atul engineering Udyog, 2014 (10) TMI 41 - ALLAHABAD HIGH COURT wherein advances and security deposits made were held to be transactions which did not attract Section 2 (22) (e). Thus, it is clear that even prior to the issue of this 2017 Circular, the position in law was clear that deemed dividend would not apply to normal commercial transactions. Viewing from this angle also, the petitioner would be entitled to succeed on this ground. Whether deemed dividend is taxable in the hands of the shareholders or concern? - HELD THAT - While the petitioner contends that deemed dividend is not taxable in the hands of shareholders, the learned Standing counsel for the Department would contend that it is taxable in the hands of the shareholder. To substantiate such a submission, the learned counsel for the Department would attempt to justify that Circular No. 495 of 1987 runs contrary to the provisions. The learned Counsel also submitted that the reference to a larger Bench in the case of National Travel Services 2018 (1) TMI 1159 - SUPREME COURT will not have any inference on this case. It will not be out of place to point out that in National Travel Services one of the learned Judges in the quorum had held that the decision in the case of Ankitech 2011 (5) TMI 325 - DELHI HIGH COURT , as upheld by Madhur Housing 2017 (10) TMI 1279 - SUPREME COURT , was wrongly decided. Nevertheless, since the matter has now been referred to a larger Bench for reconsideration, this Court does not intend to fix the liability of taxation either in the hands of the concern or in the hands of the shareholder, on an assumption that deemed dividend is taxable Whether dividend is taxable u/s 10 (34)? - HELD THAT - It is not in dispute that Section 2 (24) includes dividend income also. What is pertinent is that such dividend, including the deemed dividend under Section 2(22)(e) of the Act, is exempted under Section 10 (34) of the Act, in the hands of the petitioner. Section 10 (34) of the Act does not provide to say that the dividend will be exempted in the hands of the shareholders only when dividend distribution tax is paid. On the other hand, it only refers to say that as long as the dividend is referred to in Section 115-O of the Act, it will be exempted from tax under Section 10 (34) of the Act. In SMT. KAYAN JAMSHID PANDOLE 2018 (11) TMI 1340 - BOMBAY HIGH COURT has emphatically held that if certain income is exempted in the hands of the recipient by virtue of statutory provisions, such an exemption cannot be withdrawn only because the payer has not paid the tax, unless such provisions are made in the statute itself. In the light of the aforesaid decision, it can be held that the Settlement Commission ought to have passed orders only in accordance with the provisions of the Act and the contrary findings in the impugned order of the Commission, cannot be sustained. As such, the conclusion which this Court is able to arrive on this proposition is that dividend is not taxable as per the provisions of Section 10 (34) of the Act and the contrary findings in the impugned order of the Settlement Commission is deemed to be violative of the statutory provisions and therefore illegal. Department submitted that the decision of the Bombay High Court in Kayan Jamshid Pandole 2018 (11) TMI 1340 - BOMBAY HIGH COURT is distinguishable on facts. We are unable to endorse such a submission. A plain reading of paragraphs 8 to 11 of the said decision reveals that the Bombay High Court had laid down the proposition of law that dividend referred therein, is not taxable, without reference to the facts of that case. Hence it cannot be said that the findings therein could to be distinguished, by applying the facts of that case. Whether provisions of section 2(22)(e) can be applied for the AY where there are more that two shareholders? - HELD THAT - As seen in the facts of the instant case, the whole amount was already taxed in the hands of the petitioner and the present reassessment order of Mr.Ramasamy amounted to double taxation. What was claimed to be a hypothetical situation has now been disproved in view of the reassessment order of Mr.Ramasamy. It is stated that the matter is now pending for adjudication before the ITAT, Chennai. This Court is of the considered opinion that the CIT (Appeals) has rightly come to the conclusion that the position as regards each debit will have to be individually considered, because it may or may not be a loan. The AO is, therefore, directed to verify each debit entry on the aforesaid line and treat only the excess amount as deemed dividend u/s 2 (22) (e) of the Act. We find such a direction issued by the CIT (Appeals), as upheld by the Tribunal is in consonance with the provision of Section 2 (22) (e) of the Act, and only those amounts, which reflect in the debit side of the books of accounts of the company falling under the definition of loans and advances, with regard to the shareholder, in the relevant year will be entitled to be taken as deemed dividend. Assessment u/s 153A - HELD THAT - It is a fact that that the ground of absence of incriminating material in relation to deemed dividend, was placed before the Settlement Commission but not considered. The petitioner, by letter dated 31.08.2015, had submitted that there was no incriminating material in relation to deemed dividend found during the search and accordingly, no addition can be made under Section 2(22)(e). The said contention was taken note of by the Settlement Commission in paragraph 7.2 of its order but however, had failed to address the issue. Petitioner had submitted before the Settlement Commission during the course of search under Section 132 of the Act that no fresh incriminating material with respect to the deemed dividend was found. Unfortunately, the Settlement Commission has not addressed this issue at all. Thus, the proceedings under Section 153A r/w. 153C of the Act are not valid. For all the foregoing reasons, this Court is of the affirmed view that the order of the Settlement Commission is not in accordance with the provisions of the Act and therefore, this Court would be justified in invoking its extraordinary powers under Article 226 of the Constitution of India. Accordingly, the impugned order of the Income Tax Settlement Commission insofar as it relates to determination of deemed dividend as the income of the petitioner for the assessment years 2009-2010 to 2013-2014 are concerned, is hereby quashed. The petitioner herein shall be entitled to claim refund of any tax paid, pursuant to the impugned order of the Settlement Commission

Summary

Issues Involved:
1. Maintainability of the Writ Petition against the order of the Settlement Commission.
2. Relevance and validity of CBDT Circulars.
3. Whether deemed dividend is taxable in the hands of the shareholders or the concern.
4. Whether dividend is taxable under Section 10(34) of the Income Tax Act.
5. Applicability of Section 2(22)(e) for assessment years with more than two shareholders.
6. Validity of proceedings under Section 153A r/w. 153C without incriminating material.

Detailed Analysis:

1. Maintainability of the Writ Petition:
The Court addressed the preliminary objection regarding its jurisdiction under Article 226 to deal with the Settlement Commission's order. The Court cited the Supreme Court's decision in *Jyotendrasinhji vs. S.I. Tripathi* and others, which allows interference if the order is contrary to the provisions of the Act and prejudices the petitioner. The Court concluded that the Writ Petition is maintainable as the petitioner argued that the Commission's order was not in accordance with the Act.

2. Relevance and Validity of CBDT Circulars:
The petitioner relied on Circular No. 19 of 2017 and Circular No. 495 of 1987, arguing that deemed dividend under Section 2(22)(e) should not apply to commercial transactions. The Court noted that CBDT circulars are binding on the revenue authorities, even if they deviate from the strict interpretation of the law, as established in *UCO Bank vs. CIT*. The Court found that the transactions between RSPL and RTPL were in the ordinary course of business and thus, the circulars applied, exempting these transactions from being treated as deemed dividends.

3. Taxability of Deemed Dividend:
The Court discussed the conflicting views on whether deemed dividend is taxable in the hands of the shareholder or the concern. The Court referred to the pending larger bench decision in *National Travel Services* and concluded that, based on the binding nature of CBDT Circulars, deemed dividend is not taxable in the hands of the shareholders.

4. Taxability of Dividend under Section 10(34):
The Court analyzed Sections 10(34), 115-O, and the explanation to 115Q, concluding that dividend, including deemed dividend under Section 2(22)(e), is exempt from tax under Section 10(34). The Court cited the Bombay High Court's decision in *PCIT vs. Smt. Kayan Jamshid Pandole*, which held that the exemption applies even if the company has not paid the dividend distribution tax, as long as the statute does not explicitly withdraw the exemption.

5. Applicability of Section 2(22)(e) with Multiple Shareholders:
The Court noted that for the assessment years 2012-13 and 2013-14, there were more than one shareholder with substantial interest in RSPL and RTPL. The Court concluded that the computation mechanism of Section 2(22)(e) fails when there are multiple shareholders, making the provision inapplicable for those years.

6. Validity of Proceedings under Section 153A r/w. 153C:
The Court found that no incriminating material related to deemed dividend was found during the search, making the proceedings under Section 153A r/w. 153C invalid. The Court cited *CIT vs. Continental Warehousing Corporation Ltd* and *CIT vs. Kabul Chawla*, which held that additions cannot be made without incriminating material found during the search.

Conclusion:
The Court quashed the Settlement Commission's order regarding the determination of deemed dividend as the petitioner's income for the assessment years 2009-2010 to 2013-2014, allowing the petitioner to claim a refund of any tax paid pursuant to the impugned order. The Writ Petition was allowed, and the connected Miscellaneous Petition was closed with no costs.