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TMI Blog2012 (5) TMI 480X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provisions are not applicable to the present facts of the case the nature of transactions has no effect. - Decided in favor of the assessee - IT Appeal No. 1802 (Kol.) of 2010, - - - Dated:- 14-10-2011 - N. Vijayakumaran, C.D. Rao, JJ. A.K. Singh for the Appellant S.K. Tulsiyan for the Respondent C.D. Rao, Accountant Member 1. This appeal by the department is directed against the order of ld. C.I.T.(A), Central-H, Kolkata dated 25/5/2010 for assessment year 2003-04. The grounds raised in this appeal by the department read as under:- "(1) That under the facts and circumstances of the case the Ld. CIT(A) has erred in law and on fact in treating the advance against Rent amounting to Rs.3.8 crore by M/s. M. K. Dalmiya and Co. to the assessee company as Security Deposit whereas the same was shown Under the head of ''Advance against Rent" within the broad head of "Current Liabilities" as per Schedule-6 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the ambit of dividend as defined in sec. 2(22)(e) of the Act, because the said amount has neither been given as an advance nor a loan in this case but has been given as a security deposit for obtaining a lease from the assessee-company. It was further stated that the such security deposit cannot be treated as deemed dividend by invoking provisions of sec. 2(22)(e) of the Act on the ground that the beneficial shareholders of the lessee-company, M/s. M.L. Dalmiya and Co. Ltd., were also substantially interested in the assessee-company. It was further stated that no money was actually received by the assessee-company from M.L. Dalmiya and Co. Ltd. during the relevant year. The entire amount of security deposit was received by virtue of a journal entry and there was no actual movement of cash from the bank account of M.L. Dalmiya and Co. Ltd. to the bank account of the assessee. M/s. M.L. Dalmiya and Co. Ltd. had an outstanding balance of Rs.3.80 crores with Inspiration Clothes and U which was transferred in favour of the assessee-company in lieu of security deposit payable to it and the assessee-company was to recover the said amount from Inspiration Clothes and U Transfer of ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal before the ld. C.I.T.(A). 3. Before the ld. C.LT.(A), the ld. A/R filed a written submission detailing the facts and explaining the issue and several case laws were relied upon in support of the case, which has been reproduced at pages 3 to 8 of the appellate order. The ld. C.I.T.(A) called for comments twice from the A.O. on such submission of the assessee and counter reply on the remand report, which are reproduced at pages 8 to 18 of the appellate order. The crux of the submissions made by the Ld. A/R on behalf of the assessee before the ld. C.I.T.(A) are as under:- (a) That the assessee-company vide earlier agreement dated 10/8/1998 gave on lease its premises to its sister concern M/s. M.L. Dalmiya and Co. on an advance of Rs.3.20 crores to be adjusted against rent payable. This agreement was required to be annulled due to dispute between the parties and on an amicable settlement as a result of several correspondences, the new agreement dated 31/3/2003 in supersession of earlier agreement was entered into, by virtue of which M/s. M.L. Dalmiya and Co. Ltd. shall pay as security deposit of Rs.3.80 crores to the assessee-company in lieu of lease of its premises to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the comments of the A.O. After elaborately discussing the submissions of the assessee, comments of the A.O. and considering the facts and evidence on record, the ld. C.I.T.(A) held that the A.O. has incorrectly considered the security deposit as deemed dividend in the hands of the assessee-company and, therefore, directed the A.O. to reduce the total income by excluding the amount of Rs.3,66,31,403/- from the total income of the appellant as deemed dividend. The relevant observation of the ld. C.I.T.(A) vide para-6, pages 24 to 28 of the appellate order is reproduced below:- "6. I have gone through the assessment order, submissions of appellant and Assessing Officer. The facts of the case show that appellant had given its property at Shakespeare Sarani, Kolkata on 22 years lease to M.L. Dalmiya and Co. Ltd. vide agreement, dated 10.08.1998. The annual rent is about Rs.31-32 lakh as per assessment order and after claiming deduction u/s 24 of the I.T. Act, appellant has returned the income from house property at Rs.22,09,7887- which the Assessing Officer has not disputed. M.L. Dalmiya and Co. Ltd., the lessee, vide agreement, dated 10.08.1998 had paid Rs.3,20,00,400/- to the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the fresh agreement that the rent would be allowed to be adjusted against the "Advance rent" of Rs.3,20,00,400 taken at the time of earlier agreement in the same manner as in earlier agreement, nowhere it is mentioned in the agreement that such adjustment will be made against the security deposit of Rs.3.8 crore. Therefore the nature of "Security Deposit" taken on 31.03.2003 vide agreement dated 31.03.2003 by the appellant is certainly not an advance of the nature which the amount of Rs.32,000,400/- taken On 10.08.1998 was. The merger of both the amounts in the balance sheet of the appellant might have led the Assessing Officer to believe that the amount of Rs.3.8 crore received on 31.3.2003 is also of the same nature as the amount of Rs.3,20,00,400/- received on 10.08.1998. In remand report Assessing Officer has taken a stand that the amount of Rs.3.8 crore received on 31.03.2003 is same in nature as amount of Rs.3,20,00,4007- received on 10.08.1998 and the name of "Security deposit" is only a change of nomenclature. I do not find merit in the argument of Assessing Officer because the facts, as apparent from the lease agreements, clearly show that both the amounts are differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as signed on behalf of appellant company and therefore it is difficult to infer that the same person has managed the agreement for any purpose other than resolving the dispute as mentioned in the agreement. There are enough examples of family disputes in business world which render the argument of Assessing Officer that there can be no dispute among the family members unacceptable in absence of any substantial evidence. The accounts of appellant and the lease agreement show that the advance rent received earlier by appellant on 10.08.1998 was diminishing with adjustment of rent with the passage of time and there was no security against the loss of property which the appellant had given to the lessee for 22 years with a tacit understanding of vacating it earlier and therefore revising the lease agreement with a security deposit when the lessee is allowed to further keep and sublet the property may be a normal business transaction in absence of any contradictory evidence and argument. The material available in records should be authentic and arguments cannot be based on presumptions because notional or artificial income is being assessed through a fiction under section 2(22)(e). Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law I hold that Assessing Officer has incorrectly, considered the security deposit to the extent of accumulated profits of the Company M.L. Dalmiya and Co. Ltd. as deemed dividend in the hands of the appellant company and therefore Assessing Officer is directed to reduce the total income by excluding the amount of Rs.3,66,31,403/-from the total income of the appellant as deemed dividend." Being aggrieved, the department is in appeal before the Tribunal. 4. At the time of hearing before us, the Id. Departmental Representative relied on the order of the A.O. He further submitted that both the parties are closely related to each other and two of the shareholders held considerable shares in both the companies. Therefore, it does not make much logical sense as to guess a dispute between the parties, which has resulted in introduction of new agreement for giving security deposit by the lessor company to the assessee-company. He submitted that the fresh agreement was drawn just to give the colour of advance paid as security deposit to circumvent the rigours of sec. 2(22)(e) of the Act. The Id. Departmental Representative also relied on the decision of Hon'ble Supreme Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turn given by that employee to the assessee (M.D.) as loans and this was a frequent occurrence as and when required by the said Managing Director. In such circumstances, it was held that the loans advanced by the company to the said employee were for the benefit of the assessee and could be assessed as dividends in the hands of the assessee. In the case before us, the assessee is not a shareholder/member of M.L. Dalmiya and Co. Ltd. or vice versa. 6.1 It is further observed that the assessee-company leased out its property at Shekespeare Sarani, Kolkata to M/s. M.S. Dalmiya and Co. Ltd. for 22 years against an advance of Rs.3.20 crores to be adjusted against the rent payable by the lessee (M.L. Dalmiya and Co. Ltd.). A dispute arose between these two companies and for amicable settlement, a new agreement was entered into between them on 31/3/2003 agreeing thereby that M.L. Dalmiya and Co. Ltd. shall pay as security deposit Rs.3,80,00,000/- to the assessee-company to be refunded to them at the end of the lease period and after handing over of the possession of the property to the assessee. According to the assessee, this security deposit does not come under the ambit of sec. 2(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst limb of the provisions of s. 2(22)(e) the payment must be to a person who is a registered holder of shares. The condition under the 1922 Act and the 1961 Act regarding the payee being a shareholder remains the same and it is the condition that such shareholder should be beneficial owner of the shares and the percentage of voting power that such shareholder should hold that has been prescribed as an additional condition under the 1961 Act. It is a principle of interpretation of statutes that where once certain words in an Act have received a subsequent statute, the legislature must be taken to have used them according to the meaning which a Court of competent jurisdiction has given them. In the 1961 Act, the word "shareholder" is followed by the following words "being a person who is the beneficial owner of shares". This expression used in s. 2(22)(e), both in the 1961 Act and in the amended provisions w.e.f. ast April, 1988 only qualifies the word "shareholder" and does not in any way alter the position that the shareholder has to be a registered shareholder. These provisions also do not substitute the aforesaid requirement to a requirement of merely holding a beneficial inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CPL only as a legal and registered owner. They held shares for and on behalf of 5 beneficiaries of the trust who are different individuals. They were therefore not beneficial owners of the shares. Therefore, the first requirement of holding of shares both as a legal registered owner and beneficial owner of such shares is not satisfied in the case of the assessee. Therefore, provisions of s. 2(22)(e) would not be applicable at all to the case of the assessee. 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. 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 profit as divi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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