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TMI Blog2013 (10) TMI 460X X X X Extracts X X X X X X X X Extracts X X X X ..... a notice u/s 148 of the Act on 29/03/2011. The assessment was reopened on the reason that the assessee had received substantial amounts as advance/loan from M/s Excel Rubbers Pvt. Ltd. during the relevant previous year. The core promoter, Shri G.R. Reddy possesses more than 10% of voting rights in the assessee company and also more than 20% in Excel Rubber Pvt. Ltd and since M/s Excel Rubber Pvt. Ltd. is a closely held company and having accumulated profit, the loan/advance received by the assessee partakes the character of deemed dividend u/s 2(22)(e) of the Act. 4. During the reassessment proceeding when the Assessing Officer sought an explanation from the assessee on the issue, the assessee explained that the amounts received from Excel Rubber Pvt. Ltd was in the form of Inter Corporate Deposit (ICD) and advances are for business purposes, hence, cannot be treated as deemed dividend. The assessee further contended that since the assessee is not a shareholder in M/s Excel Rubber Pvt. Ltd., the amount received cannot be treated as deemed dividend. The assessee also sought a direction from the Addl. CIT u/s 144A of the Act on the issue. The Addl. CIT, as noted in para 4 of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of MTAR Technologies (supra), the deemed dividend u/s 2(22)(e) can only be taxed in the hands of the share holder and therefore the loans and advances received by the appellant which is not a share holder of the Exel Rubber Ltd., cannot be treated as deemed dividend in its hand. Therefore the addition made in the hands of the appellant company of Rs. 1,44,86,549/- on account of deemed dividend is ordered to be deleted. If at all there is any deemed dividend, it has to be considered in the hands of the common share holder and since there are no findings by the Assessing Officer that the common share holder has withdrawn any amounts form the advances for his personal benefit, the Assessing Officer is directed to examine the applicability of section 2(22)(e) in the hands of Sri G.R. Reddy." 7. Being aggrieved by the order of the CIT(A), the revenue is before us. 8. We have heard submissions of the parties and perused the materials on record as well as the orders passed by the revenue authorities. We have also carefully examined various judicial precedents placed before us. So far as ICDs of Rs. 2,91,50,000/- is concerned we fully agree with the conclusion of the CIT(A) that it ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Bombay High Court in Universal Medicare (P) Ltd.(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 shareholder has at least 20% of the voting power. (c) A concern (other than company) in which such shareholder has at least 20% interest. (3) The payer company has accumulated profits on the date of any such payment and the payment is out of accumulated 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 become t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red, 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 avail. 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 Courts 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 22.09.1997 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. (supra)that such observations are not binding on the Courts. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RC as it is not a shareholder in MTAR Technologies Pvt. Ltd. (Hereinafter called as MTAR). In this regard, the assessee relies on the declslon of the ITAT Mumbai Bench "G" in the case of Seamist Properties Pvt. Ltd. vs. ITO reported in (2005) 1 SOT page 142. The assessee further submits that the provisions of sec. 2(22)( e) mention as under: "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 day of 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) holding not less than ten per 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 payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the- extent to which the company in either case possesses accumulated profits" 6. The int ..... X X X X Extracts X X X X X X X X Extracts X X X X
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