9911796707
TMI Blog2012 (5) TMI 480X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(22)(e) of the Income Tax Act, 1962." 2. The facts of the case in brief are that the original assessment in the case of the assessee for the assessment year under consideration was made u/s. 143(3) determining the total income as returned by the assessee at Rs.22,38,540/-. The ld. C.I.T. vide his order dated 29/2/2008 passed u/s. 263 of the Act set aside the matter for de novo assessment on the ground .that no requisite enquiry was made by the A.O. on the issues of treatment of receipt of advance rent received by the assessee from M/s. M.L. Dalmiya and Co. Ltd. as deemed dividend u/s. 2(22)(e) of the Act. The assessee appealed to the Tribunal against the said direction of ld. C.I.T. given in his order u/s. 263 of the Act, but was unsuccessful. During the course of set aside proceedings, the assessee appeared on several dates and also filed details/evidences as required vide notices u/s. 143(2)/142(1) of the Act. It was stated that the assessee is the owner of a property located at 32, Shakespeare Sarani, Kolkata. The assessee entered into an agreement dated 10/8/1998 with M/s. M.L. Dalmiya and Co. Ltd. to give the said property to this company on lease for 22 years agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not convinced/satisfied with the submissions of the assessee and passed revised assessment order u/s. 143(3)/263 of the Act dated 26/12/2008 adding therein Rs.3,66,31,403/- as deemed dividend u/s. 2(22)(e) of the Act by observing as under:- "I have examined the above submission of the assessee and it is observed that during the relevant financial year, the assessee derived income from house property, supervision charges and interest. The rental income was from a house property located at 32, Shakespeare Sarani, Kolkata-700 017 given on rent to M.L. Dalmiya and Company Private Limited. During the year the tenant, M/s. M.L. Dalmiya and Company Private Limited had given advance rent of Rs.3,80,00,000/- to the assessee company. As on 31.03.2003 out of total issued and subscribed shares, two share holders namely, Avishek Dalmiya and Smt. Chandralekha Dalmiya were having shareholding of 40% and 12.27% respectively in the assessee company .On perusal of the assessment record of M/s. M.L. Dalmiya and Company Private Limited, it was found that the above two persons were also having beneficial share holding of 60% and 15.48% in the said company as on 31.03.2004. M/s. M.L. Dalmiya an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id company. The assessee-company only derives rental and supervision charges from the said company for leasing out its said property. He submitted that deemed dividend in terms of sec. 2(22)(e) of the Act 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. Reliance was made on Asstt. CIT v. Bhaumik Colour (P.) Ltd. [2009] 27 SOT 270/118 ITD 1 (Mum.)(SB)and CIT v. Hotel Hilltop[2009] 313 ITR 116 (Raj.). (b) That in order to invoke provision of sec. 2(22)(e) of the Act, the condition which is to be satisfied is that a sum must have been advanced as a loan or advance for the individual benefit of a shareholder. Security deposit is not a loan or advance because the amount paid in advance would eventually become due. On the other hand, security deposit is the deposit of a property, bonds, cash etc. by or on behalf of a person in order to secure his fulfilment of an obligation and it is forfeitable in the event of non-fulfilment and is paid to secure somebody's valuable asset, which is in the present case the assessee's property at 32, Shakespeare Sarani, Kolkata. Reliance in this conn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent received from M.L. Dalmiya and Co Ltd" submitted during the appellate proceedings by the appellant as under: Advance against Rent received from M L Dalmiya and Co. Ltd. Advance received on 10.08.1998 32,000,400 Adjusted till 31.03.2002 5,728,537 Balance on 31 .03.2002 26,271,863 Adjusted upto 31.03.2003 1,578,420 Security Deposit received on 31.03.2003 38,000,000 Balance Amount 62,693,443 A dispute arose between appellant and M.L Dalmiya and Co Ltd, which is mentioned in para 5.3 of the agreement dated 31.03.2003 between the two. It appears that though the lease agreement dated 10.08.1998 was made for 22 years, there was a tacit understanding between appellant and M.L Dalmiya and Co. Ltd. that M.L Dalmiya and Co. Ltd. would use the premises of appellant only during the period its "Calcutta Leather Complex" at Batala would be under construction and after the completion of its construction, M.L Dalmiya and Co. would vacate the premises of appellant. Appellant submitted that dispute was settled by the intervention of a third party, Shri Shyamanand Jalan, Advocate, on whose advice the terms of settlement were decided upon. Therefore a fresh lease agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e M.L Dalmiya and Co. as and when they vacate the premises. This shows that Rs.3.8 crore is a security for the appellant against any loss of the premises. The security deposit of Rs.3.8 crore remains the same throughout the lease period unlike the advance rent of Rs.3,20,00,400/- which keeps diminishing during the lease period due to adjustment after the rent falls due. Appellant has submitted a number of court decisions where it is held that a deposit or a security deposit is different from Advance and loan. In response to these court decisions, submitted by the appellant, Assessing Officer has raised another suspicion in the remand report that the security deposit of Rs.3.8 crore paid to appellant by M.L Dalmiya and Co. in revised agreement dated 31.03.2003, with a view to settle a dispute between them, appears artificial and indicates at other motives because the two parties, appellant and M.L. Dalmiya and Co. Ltd. are closely related. The argument presented by the Assessing Officer has some force because Shri Avishek Dalmiya controls 60% of stake in M/s. M.L. Dalmiya and Company and 40% stake in appellant company and Chandralekha Dalmiya controls 15.48% of stake in M/s. M.L. Da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agreement is not proved to be a design, such security deposit cannot be considered an advance or loan. In any case, the facts stated in the assessment order show that Shri Avishek Dalmiya and Smt. Chandralekha Dalmiya had beneficial shareholding of 60% and 15.48% respectively in the Company M/s M.L. Dalmiya and Company. The Company M/s M.L. Dalmiya and Company had given the disputed amount of Rs.3.8 crore to the appellant company in which Shri Avishek Dalmiya and Smt. Chandralekha Dalmiya had 40% and 12.27% beneficial shareholding in appellant company. Appellant has submitted that appellant company neither holds any share in M. L. Dalmiya and Co. Ltd. nor has any beneficial interest in the said company and this fact has not been contradicted by the Assessing Officer in his remand report. Therefore when M. L. Dalmiya and Co. Ltd. could not have issued any dividend to the appellant under normal circumstances, the question of taxing deemed dividend in case of appellant who is not a registered shareholder in M.L. Dalmiya and Co. Ltd. does not arise in view of the decision of the Special Bench of the I.T.A.T. in the case of Asstt. Commissioner of Income Tax v. Bhaumik Colour (P.) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so been filed by the assessee. He further submitted that the A.O. erred in treating the security deposit as deemed dividend u/s. 2(22)(e) of the Act and thus misconceived the facts and wrongly the above section. That the A.O. failed to consider the fact that the sum was on account of security deposit and not advance for obtaining lease of the assessee's property by M.L. Dalmiya and Co. Ltd. to be refunded on expiry of lease period. He further submitted that the A.O. failed to appreciate that Rs.3.80 crores was received by way of journal entry and no actual movement of cash was effected between the assessee-company and the lessee-company. He submitted that the assessee-company neither holds any share in M.L. Dalmiya and Co. Ltd. nor has any beneficial interest in the said company. It only derives rental income from the said company for leasing out its premises at 32, Shakespeare Sarani, Kolkata. He, therefore, submitted that the A.O. could not make out any case to invoke sec. 2(22)(e) of the Act as the said section applies only in the case of a shareholder and to nobody else. In this connection, the ld. counsel for the assessee referred to Special Bench decision of I.T. A.T., Mumbai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.O., this was advance. From the assessment order we observe that as on 31.03.2003 out of total issued and subscribed shares, two share holders namely, Avishek Dalmiya and Smt. Chandralekha Dalmiya were having share holding of 40% and 12.27% respectively in the assessee company and these two persons were also having share holding of 60% and 15.48% respectively in M.L. Dalmiya and Co. Ltd. It is also not disputed that the assessee-company let out its premises to M.L. Dalmiya and Co. Ltd. for earning rental income, which is a commercial transaction. 6.2 In the above context, we would like to refer to the relevant provision of section 2(22)(e) of the IT Act as well as Explanation 3 to Section 2(22)(e) of the Act which defines as under: "(e) Any payment by a company, not being a company in which the public are substantially interested, of any, sum (whether as representing, a part of the assets of the company or otherwise) made after the 31st May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d beneficial shareholder. If a person is a registered shareholder but not the beneficial then the provision of s. 2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the first limb of provisions of s. 2(22)(e) will not apply. The new category of payment which was considered as dividend introduced by the Finance Act, 1987 w.e.f. ast April, 1988 by the second limb of s. 2(22)(e) is payment "to any concern in which such shareholder is a member or a partner and in which he has a substantial interest". The following conditions are required to be satisfied for application of the above category of payment to be regarded as dividend. They 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 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. This is because of the expression "such shareholder" found in the relevant provision. This expression only refers to the shareholder referred to in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders 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 dividend 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 legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern. The basis of bringing in the amendment to s. 2(22)(e) by the Finance Act, 1987, w.e.f. ast 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 concern can draw the same from the concern instead of the company directly making payment to the shareholder as divid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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