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TMI Blog2013 (10) TMI 1389X X X X Extracts X X X X X X X X Extracts X X X X ..... ng and sale promotion besides various other activities. For the assessment year under dispute the assessee filed its return of income on 30/09/2009 admitting a loss of ₹ 1,48,13,495/-. The return was processed u/s 143(1) of the Act. During the course of assessment proceeding the Assessing Officer noticed that the assessee was providing services to M/s Ushodaya Enterprises Ltd. For rendering services the assessee was receiving advances from Ushodaya Enterprises and the advances are subsequently adjusted against the bills raised for the services rendered. The Assessing Officer further noticed that Ch. Ramoji Rao (HUF) is holding 90% share or voting right in both the companies. Ushodaya Enterprises Ltd is also having accumulated profits. The Assessing Officer therefore was of the view that the excess advances received against the services to be rendered comes under the purview of deemed dividend u/s 2(22)(e) of the Act. Though it was submitted by the assessee that the advances are not in the nature of loans but were trade credits against which bills were raised and services were rendered, the Assessing Officer however rejecting such contention held that advances received fell wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ITAT, Mumbai Special Bench in case of Bhaumic Colours (P) Ltd., 313 ITR (AT) 146 and held as under: 22. Insofar as the provisions of Section 2(22)(e) are concerned, we have already extracted this provision and taken note of the conditions/requisites which are to be established for making provision applicable. In Commissioner of Income Tax Vs. C.P. Sarathy Mudaliar[1972] 83 ITR 170, the Supreme Court had traced out the assessee of this provision in the following manner: Any payment by a company, not being a company in which the public are substantially interest, of any sum (whether as representing a part of the assets of the company or otherwise) made after 31.05.19987 by way of advance or loan. First limb a) to a shareholder, being a person who is the beneficial 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 percent of the voting power, Second limb b) or to my 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) Third limb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under Section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to dividend . Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to shareholder . When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under Section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non-members. The second category specified under Section 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses. Therefore, it would always be open to the Revenue to take corrective measure by treating this dividend income at the hands of the shareholders and tax them accordingly. As otherwise, it would amount to escapement of income at the hands of those shareholders. 8. The same view has also been expressed by the Hon ble Delhi High Court again in case of CIT Vs. Navyug Promoters P. Ltd. (203 Taxman 618) and Hon ble Bombay High Court in case of CIT Vs. Universal Medicare (P) Ltd., (324 ITR 263). 9. The ITAT, Hyderabad Bench in case of MARC Manufacturers Pvt. Ltd. Vs. ACIT in ITA No. 555/Hyd/2008 dt. 31/08/2009 while considering identical issue of advancement of loan to one company, which is not a shareholder of the lender company following the decision of ITAT Mumbai Special Bench in case of Bhaumik Colour P. Ltd. (supra) and other decisions held as under: 5. It can be seen from the circular that the provisions of amended section 2(22)(e) are to be applied only to the payments made to the shareholders and not to any other person or concern other than the shareholders. The Allahabad High Court in the case of CIT vs. H.K. Mittal reported in 219 ITR 420 held that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, the tax is to be deducted at source from a dividend or deemed dividend and the consequential effect of giving effect to such deduction of tax at source, etc., reference was made only to the payments to the shareholder. This would indicate clearly that clause (e) would apply only in case of payments to the shareholder and not to others. Therefore, considered in the light of the ratios laid down as aforesaid the advances cannot be treated as deemed dividend coming within the ambit of section 2(22)(e) of the Act. 10. Even otherwise also the amounts received by the assessee from M/s Ushodaya Enterprises P. Ltd. cannot be treated as deemed dividend under section 2(22)(e) of the Act. On a perusal of the order passed by the CIT(A) for the assessment year 2006- 07, which is also in appeal before us, it is very much evident that the CIT(A) has elaborately and exhaustively dealt with the issue by examining all the relevant facts and materials and thereafter has come to the conclusion that the amounts received by the assessee from M/s Ushodaya Enterprises is in regular course of trade, hence, outside the purview of section 2(22)(e) of the Act. On the contrary, the Assessing ..... 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