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TMI Blog2014 (9) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... F 2010 WITH INCOME TAX APPEAL NO. 1028 OF 2011 WITH INCOME TAX APPEAL NO. 1351 OF 2011 WITH INCOME TAX APPEAL NO. 1844 OF 2011 WITH INCOME TAX APPEAL NO. 2301 OF 2011 WITH INCOME TAX APPEAL NO. 154 OF 2012 WITH INCOME TAX APPEAL NO. 316 OF 2012 WITH INCOME TAX APPEAL NO. 317 OF 2012 WITH INCOME TAX APPEAL NO. 318 OF 2012 WITH INCOME TAX APPEAL NO. 398 OF 2012 WITH INCOME TAX APPEAL NO. 1069 OF 2012 WITH INCOME TAX APPEAL NO. 1162 OF 2012 WITH INCOME TAX APPEAL NO. 1647 OF 2012 WITH INCOME TAX APPEAL NO. 16 OF 2013 WITH INCOME TAX APPEAL NO. 540 OF 2013 WITH INCOME TAX APPEAL NO. 578 OF 2013 WITH INCOME TAX APPEAL NO. 694 OF 2013 AND ITS/4909/MUM/2011 WITH INCOME TAX APPEAL NO. 1174 OF 2013 AND ITA/4311/MUM/2011 WITH INCOME TAX APPEAL NO. 1399 OF 2013 AND ITA/8287/MUM/2011 WITH INCOME TAX APPEAL NO. 1499 OF 2013 AND ITA 7554/MUM/2011 WITH INCOME TAX APPEAL NO. 1666 OF 2013 AND ITA/7232/M/2010 WITH INCOME TAX APPEAL NO. 1870 OF 2013 AND ITA/8750/2010 JUDGMENT In these Appeals which have been filed by the Revenue, the challenge is to the order of the Income Tax Appellate Tribunal holding that the provisions of Section 2(22)(e) of the Income Tax Act,1961(for short "I. T. Act) cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lder therein. The lender is a company within the meaning of Clause (e). According to Mr. Gupta, shareholder of the lender company is also closely connected with the concern which is a recipient of the loan or advance. Therefore, the recipient being required to be a registered shareholder of the lender company, cannot be spelled out from the provision in question. He also then submits that the judgment in the case of Universal Medicare is distinguishable on facts. There, the assessee was not the recipient of the loan or advance in money. Thus, the Division Bench of this Court in Universal Medicare was not required to go into the second aspect of the matter. The Division Bench, yet, answered the second question framed by it and termed as a substantial question of law. Though that is based on the findings of the Tribunal, particularly, as to whether the recipient was required to be a shareholder of the recipient, all such findings and observations are in the nature of obiter dictum. They are not binding on this Court. Therefore, this Court is free to take an independent view. In any event, if this Court is not inclined to agree with the Division Bench in the case of Universal Medicare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jammu and Kashmir. It is submitted that the judgments rendered by these High Courts and particularly the Delhi High Court would show that there is nothing erroneous and this circular, therefore, cannot override the clear legal provision. The wording thereof cannot be ignored by preferring the language of the circular. That would mean the Court interprets the legal provisions in the light of their understanding of the executive or revenue. It is submitted that interpretation of a legal provision is the duty and function of the Court. Such circulars, therefore, have no binding force or effect and the Court must go by the language of the statute. 11 Reliance is placed upon the judgments which have been compiled before us by the assessee's counsel. 12 With the assistance of the learned Senior Counsel appearing for the Revenue and the assessees, we have perused Section 2 (22) (e) of the I. T. Act. The same reads thus: 2 (22) " dividend" includes ( a)............ . (b) ......... (c) ....... . (d) .......... (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 compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place]. Explanation 3.For the purposes 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 interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern;] 13 A bare perusal thereof, would indicate that term "dividend" includes any distribution by a company of accumulated profits, any distribution to its shareholders by a company of debentures, debenturestock, or deposit certificates in any form, whether with or without interest, any distribution made to the shareholders by the company on its liquidation, any distribution made to the shareholder by a company on the reduction of its capital and all this is dealt with by clauses (a) to (d) of Section 2(22) of the I. T. Act. 14 Then comes clause (e) which says that any payment b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment was subsequently rectified determining the assessed income at Rs. 3,32,31,204/. The case was selected for scrutiny. The assessee company is engaged in the business of manufacture and sale of printed Aluminum Collapsible Tubes and Auxiliary Machine used in manufacture of tube. What is relevant and material for our purpose is disallowance under Section 2(22)(e) of the I. T. Act. During the assessment year under consideration namely 20062007, credit entries were found in the books of the assessee company. M/s Bhavin Containers Pvt Ltd, M/s Patel Aluminium Pvt Ltd, M/s. Lans Metal Pvt Ltd and M/s. Patcart Packaging Pvt Ltd had lent an advanced monies to the assessee company. One M. I. Patel, Director of the Assessee company holds more than 10% of equity shares in all the companies noted above. He also holds more than 20% of the shares of the assessee company. The Assessing Officer perused the balance sheet of the respective companies and it revealed that the reserves and surpluses in all these companies are more than the amount standing to the credit of these companies. This is the position in the case of all companies except M/s. Patcart Packaging Pvt Ltd and that is how he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Rs. 96,16,924/made under section 2(22) (e) of the Income Tax Act, 1961. On this point there is an order of the Tribunal in the case of DCIT v/s M/s. Patel Aluminium Pvt Ltd in ITA No.1598/Mum/2010 dated 19.01.2011. The controversy in this case was whether an addition for deemed dividend can be made in the hands of the recipient of the amount even though he is not a shareholder of the lender company. It was held, following the decision of the Special Bench of the Tribunal in the case of ACIT v/s Bhaumik Colour P. Ltd (2009) 313 ITR (AT) 146 (Mum)(SB) that in order to attract the applicability of section 2 (22) (e) the recipient of the amount from the company has to be a registered shareholder of the company. In the present case the following credit balances were shown in the assessee's account in the following companies: (i)M/s. Bhavin Containers P.Ltd Rs. 38,75,412/ ( ii)M/s.Patel Aluminium Pvt Ltd Rs. 93,978/ ( iii)M/s Lans Metal Pvt Ltd Rs. 28,94,357/ ( iv)M/s.Patcart Packaging Pvt Ltd Rs. 44,31,466/ The finding of the CIT(A) is that the assessee is not a shareholder in any of the aforesaid companies. According to the Assessing Officer, one M. I. Patel who was a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(22)(e) was held not to apply. Secondly, the Tribunal held that even otherwise, the amount would have to be taxed in the hands of the shareholder who obtained the benefit and not in the hands of the assessee. 7. Under Section 56, income of every kind which is not to be excluded from the total income under the Act is chargeable to income tax under the head income from other sources, if it is not chargeable to income tax under any of the heads specified in items (a) to (e) of Section 14. Under Clause (1) of subsection (2), income by way of dividend is chargeable to income tax under the head income from other sources. Section 2(22) provides an inclusive definition of the expression 'dividend' for the purposes of the Act. Section 2(22)(e) is as follows: (22) "dividend" includes ( a) to (d).... (e) any payment by a company, not being a company in which the public are substantially interested, or 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 wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount in question had actually been defalcated and was not reflected in the books of account of the assessee. The fact that there was a defalcation seems to have been accepted since this amount was allowed as a business loss during the course of assessment year 2006-2007. Consequently, according to the Tribunal the first requirement of there being an advance or loan was not fulfilled. In our view, the finding that there was no advance or loan is a pure finding of fact which does not give rise to any substantial question of law. However, even on the second aspect which has weighed with the Tribunal, we are of the view that the construction which has been placed on the provisions of Section 2(22) (e) is correct. Section 2(22)(e) defines the ambit of the expression 'dividend'. All payments by way of dividend have to be taxed in the hands of the recipient of the dividend namely the shareholder. The effect of Section 2(22) is to provide an inclusive definition of the expression dividend. Clause (e) expands the nature of payments which can be classified as a dividend. Clause (e) of Section 2(22) includes a payment made by the company in which the public is not substantiall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs of fact are that the amount was a part of the fraud committed on the assessee and the transaction was not reflected in its books of accounts would not mean that Section 2(22)(e) is not applicable or attracted. The Tribunal held that it does not apply in the light of such factual position. However, it was also urged that the Tribunal's second conclusion that even if the factual aspect denotes payment within the meaning of Section 22(2) (e) of the I. T. Act, that would have to be taxed in the hands of the shareholder who obtained the benefit and not in the hands of the assessee, raises substantial questions of law. 24 It is in that regard that the above reproduced observations of the Hon'ble Division Bench have been made. The Division Bench held that even on the second aspect, the construction which has been placed on the provision (Section 2(22)(e)) by the Tribunal is correct. All payments by way of dividend have to be taxed in the hands of the recipient of the dividend namely the shareholder. The section provides inclusive definition of term dividend and rather explaining the nature of payment which can be classified as such, therefore, the Division Bench concluded that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el of the assessee by pointing out not only the judgment in the Universal Medicare takes care of all these aspects but interpretation placed on the provision in that judgment has found favour with several High Courts and the leading judgment of the Delhi High Court which follows the view taken in Universal Medicare is relied upon. 27 We have perused the provision carefully and equally the judgment in the case of Universal Medicare and the view following the same rendered by several High Courts. We are of the opinion that there is no merit in the contentions of the Revenue that Universal Medicare was either erroneously decided or that the view taken in Universal Medicare requires reconsideration. In that regard, we must not brush aside the binding precedent or the judgment of a coordinate bench simply because some of the arguments canvassed before us were either not canvassed or if canvassed were not considered. The binding precedent can be ignored only if it is perincuriam. Such is not the stand before us. All that is urged is several facets and which emerge from a reading of section namely Section 2(22) together with its subclauses have not been noticed by the Division Bench whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of money is substantial part of the business of the company. Equally, any dividend paid by the company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of subclause (e), to the extent to which it is so set off, is also excluded advisedly. 29 We are also of the opinion that any reference to Explanation 3 and particularly the definition of term "concern" will not advance or carry the Revenue's case any further. Eventually, it is the shareholder who is registered as such who is entitled to receive the dividend. Merely because the payment is made to him by way of advance or loan was not termed as such earlier that the legislature has inserted such a payment in the definition of the term "dividend" and made the definition wide and broad so also inclusive. 30 We do not see how with this legal position and the status of the shareholder recognized in law can be ignored while interpreting Section 2 (22) (e) of the I. T. Act. Precisely, this is what has been done by this Court in the judgment rendered in the case of Universal Medicare. It is not necessary for us to make a detailed reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that even if the words as noted by us hereinabove have been inserted in the definition so as to make reference to the beneficial owner of the shares, still the definition essentially covers the payment to the shareholder and the position of the shareholder as noted in the Supreme Court's decision, cannot undergo any change. That legal position and status of the shareholder being the same, we do not see how the view prevailing from Commissioner of Income Tax v/s C. P. Sarathy(supra) is in any way said to be changed. That is how all the judgments subsequent thereto have been rendered. The reliance placed by Ms. Vissanjee on the judgment of the Division Bench of this Court in the case of Commissioner of Income Tax, Patiala v/s Shahzada Nand and Sons and Ors, reported in (1966) 177 ITR 393, is therefore, apposite. Equally, her reliance on the judgment of the Division Bench of Delhi High Court is well placed. We have noted that the Delhi High Court and even after exhaustive amendment to Section 2(22)(e) held that the payment made to any concern would not come within the purview of this subclause so long as it contemplated shareholders. The Division Bench of Delhi High Court has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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