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TMI Blog2017 (5) TMI 1365X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is made to shareholder. Wherever, 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. In view of the foregoing discussion and following the special bench decision of Mumbai Tribunal in the case of ACIT Vs. Bhaumic Colour Pvt. Ltd. [2008 (11) TMI 273 - ITAT BOMBAY-E] as well as the decision of the Hon’ble Delhi High court in the case of CIT Vs. Ankitech P. Ltd.[2011 (5) TMI 325 - DELHI HIGH COURT ], we hold that the dividend income is taxable in the hands of shareholders and not in the hands of the concern. Accordingly, we dismiss the assessee’s ground on this issue. Once we find that the loan or advance is not taxable in the hands of such concern and should be taxed in the hands of shareholder and that is a correct legal position according to us, such a circular would be of no use. Further, Circulars are not binding on the courts. Accordingly, we dismiss this ground of assessee. Unable acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital of ₹ 10,00,000/- issued capital of ₹ 6,00,000/-. In spite of such huge amount of share application money pending for allotment and very less scope for issued capital in the case of second mentioned company, again M/s Caspian Capital and Finance Pvt. Ltd., (formerly known as GVK Capital Finance Ltd.,) advanced an amount of ₹ 36.10 lakhs and 15.00 lakhs during the year in the guise of share application money to M/s. Metro Architecture Contractors Pvt Ltd and Orbit Travels Tours Pvt Ltd., respectively. 3.2. During the assessment proceedings the assessee filed reply to the show cause/ objections in various dates. The same were summarized in the assessment order, as under. 1. All the material facts were available with assessing officer in relation to the share application money and investment details during the original assessment. 2. Legitimate Business Transactions cannot be re-characterized. 3. There is no requirement under any law to have adequate authorized capital at the time of receiving share application money. 4. Deeming provisions should be interpreted strictly. 5. The Hon'ble Delhi High Court in the case of Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of ₹ 4,01,18,158/- 10.5. The fact that the authorized capital of the above mentioned company substantially low when compared to the share application money received by it coupled with the fact that the shares are yet to be allotted proves that the amount advanced by M/ s. Caspian Capital and Finance P Ltd though termed as share application money, is in fact in the nature of unsecured loan. Consequently, the amount advanced by M/s Caspian Capital and Finance P Ltd. to M/s. Metro Architectures Contractors Pvt Ltd and M/s Orbit Travels Tours Pvt Ltd is assessable as deemed dividend in the hands of Smt. Indira Krishna Reddy for the A.Y 2007-08 in accordance with the provisions of section 2(22)(e) of the Act. Therefore, an amount of ₹ 51,10,000/- added to the returned income of the assessee. 4. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A) and contended that the company M/s Caspian Capital and Finance Pvt. Ltd. is an investment holding company and is in the business of investing shares of authorized group companies and further stated that the said transaction was a purely commercial and legitimate business transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Commissioner of Income Tax (Appeals) ought to have seen that the appellant did not receive any payment from Caspian Capital and Finance Pvt Ltd and therefore erred in confirming the addition made u/s.2(22)(e) as deemed dividend. 3) For all of the above and such other grounds as may be urged at the time of hearing it is most respectfully prayed that the Hon'ble Tribunal may kindly direct the Assessing Officer to delete the addition of ₹ 25,55,000/- sustained by the Commissioner of Income Tax out of ₹ 51,10,000/- made by the Assessing Officer as deemed dividend u/s.2(22)(e) in the interest of justice. 6.1 The assessee has raised the following additional grounds of appeal: 4. That on the facts and in the circumstance of the case and in law, the Ld. CIT(A) has erred in upholding that the action of Ld. AO in not considering/following the CBDT Circular No 495 of 1987 dated 22 September 1987 which was binding on the Ld. AO. 5. Without prejudice to grounds 1 to 4 above, that on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not restricting the addition under section 2(22)(e) of the Income tax Act, 1961 proportionate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany; and (iii) where the member or partner of the concern is also beneficially entitled to 20 per cent of the income of such concern. With a view to avoid the hardship in cases where advances or loans have already been given, the new provisions have been made applicable only in cases where loans or advances are given after 31st May, 1987. These amendments will apply in relation to assessment year 1988-89 and subsequent years. 8.2 Referring to the above Circular, the ld. AR submitted that the explanation in the aforesaid circular clearly provides that deemed dividend is to be taxed in the hands of the concern in receipt of loans and advances rather than in the hands of the shareholder, unless, the shareholder itself receives the loan. However, the lower authorities in the instant case, without considering the CBDT circular, has taxed share application money as deemed dividend under section 2(22)(e) of the Act in hand of the Appellant. If the action of the Ld. AO is accepted it will give arise to several administrative issues. 8.3 Further, the ld. AR relied on the decision of the Hon'ble Apex Court in the case of Gopal and Sons (HUF) -vs.- CIT [2017/ 77 taxmann.com 71 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... registered shareholder. the provisions of deemed dividend are not attracted. For this reason, judgment in CP. Sarathy Mudaliar, relied upon by the learned counsel for the appellant, will have no application. That was a judgment rendered in the context of Section 2(6-A)(e) of the Income Tax Act, 1922 wherein there was no provision like Explanation 3. 8.4 Further, ld. AR submitted that the charging provision does not specifically provides as to how the income should be computed in the hands of shareholders. As held in various judicial pronouncement that in the absence of computation mechanism the charging provisions fails. Given the same, in the absence of any prescribed mechanism for computation of dividend in the hands of shareholders, the charging provision fails and accordingly no dividend would be assessable in the hands of shareholders. In this connection, he relied on the following decisions: (i) Hon'ble Apex Court in the case of CIT -vs. - B.C. Srinivasa Shetty (1981) 128 ITR 294 (SC) held that under the scheme of Income-tax Act, 1961 charge of tax will not get attracted unless the case or transaction falls under the governance of the relevant computation provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterpreting the statute and held that deemed dividend should be taxed in the hands of shareholder and not in the hands of recipient/concern. The decision of Gopal and Sons (HUF) (supra) relied on by the assessee is related to HUF. She submitted that in the case of individual, HUF cannot be a shareholder, but, the Karta is a shareholder. The Hon ble Supreme Court while rendering the decision in the said case, held that even if HUF is not a registered shareholder of payer company, as per the provisions of section 2(22)(e) of the Act, once the payment is received by the HUF and the shareholder (i.e. Kartha) is a member of the HUF and he also holds substantiate interest in the HUF, the loan/advance made by the payer company to the HUF shall constitute deemed dividend in the hands of HUF. She, therefore, submitted that the said case is not applicable to the facts of the case. She further argued that the special bench decision of Mumbai Tribunal in the case of ACIT Vs. Bhaumik Colour Pvt. Ltd., 313 ITR (AT) 146 is squarely applicable to the facts of the assessee s case. Accordingly, ld. DR contended that dividend income should be taxed in the hands of the assessee being a shareholder and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 M/s. ACE Tyres Limited, Bachupally, Ranga Reddy District dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Once it is found that such loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not a shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n MTAR Technologies Pvt. Ltd. (Hereinafter called as MTAR). In this regard, the assessee relies on the decision 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 11.4 The ITAT Mumbai Special Benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to hold that the same noun is being used after the word such with all its characteristics which might have been indicated earlier in the same sentence. (d) If the above conditions are satisfied then the payment by the company to the concern (c) The very same person referred to in (b) above must also be a member or a partner in the concern holding substantial interest in the concern viz., when the concern is not a company, he must at any time during the previous year, be beneficially entitled to not less than twenty per cent of the income of such concern; and where the concern is a company he must be the owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power. (d) If the above conditions are satisfied then the payment by the company to the concern will be dividend. 27. In the case of the assessee it is seen that conditions (b) and (c) are not satisfied inasmuch as NNT held shares in UPPL and BCPL only as a legal and registered owner but not as a beneficial owner. In the case of the assessee it is seen that the three trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration in the case of the assessee viz., as to whether deemed dividend under s. 2(22)(e) of the IT Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender ? However, in the case of the intervener viz., Asstt. CIT vs. Weaveland, ITA No. 5036/Del/2008 (supra) this question needs to be answered. The facts in the case of the intervener have already been narrated earlier and are not being repeated here. 30. At the outset it has to be mentioned that provisions of s. 2(22)(e) which brought in a new category of payment which was to be considered as dividend as introduced by the Finance Act, 1987 w.e.f 1st April, 1988 viz., payment by a company to any concern in which such shareholder is a member or a partner and in which he has a substantial interest do not say, as to in whose hands the dividend has to be brought to tax, whether in the hands of the concern or the shareholder . We have already seen the divergent views on this issue which have been referred to in the earlier part of this order. 31. The above provisions were subject-matter of consideration before the Hon ble Rajasthan High Court in the case of CIT vs. Hotel Hilltop (supra). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest, or any payment by any such company, on behalf or for the individual benefit of any such shareholder...... . Thus, the substance of the requirement is that the payment should be made on behalf of or for the individual benefit of any such shareholder. Obviously, the provision is intended to attract the liability of tax on the person, on whose behalf, or for whose individual benefit, the amount is paid by the company, whether to the shareholder, or to the concerned firm. In which event, it would fall within the expression deemed dividend . Obviously, income from dividend is taxable as income from the other sources under s. 56, and in the very nature of things the income has to be of the person earning the income. The assessee in the present case is not shown to be one of the persons; being shareholder. Of course, the two individuals being R and D, are the common persons, holding more than requisite amount of shareholding and are having requisite interest, in the firms, but then, thereby the deemed dividend would not be deemed dividend in the hands of the firm, rather it would obviously be deemed dividend in the hands of the individuals, on whose behalf, or on whose individual b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that deemed dividend would be taxed in the hands of a concern (non-shareholder) also if the conditions mentioned in the section are satisfied. 34. We are of the view that 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) of the Act. 35. The intention behind enacting provisions of s. 2(22)(e) are 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 taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders 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 paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is substantially interested deeming them as dividend in the hands of a shareholder the ordinary and natural meaning of the word dividend is altered. To this extent the definition of the term dividend can be said to operate. If the definition of dividend is extended to a loan or advance to a non-shareholder, the ordinary and natural meaning of the word dividend is taken away. In the light of the intention behind the provisions of s. 2(22)(e) and in the absence of indication in s. 2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a non-shareholder cannot be taxed as deemed dividend in the hands of a non-shareholder. 38. The basic characteristic of dividend as held by the apex Court in the case of Kantilal Manilal vs. CIT (1961) 41 ITR 275 (SC) is a share of profits of the company given to its shareholders. Further, s. 206 of the Companies Act, 1956 prohibits payment of dividend to any person other than the registered shareholder. If one were to break up the natural meaning, the following two components emerge (a) dividend is a share of profits of the company; (b) paid to its shareholde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the concern then the benefit of set off cannot be allowed to the concern, because the concern can never receive dividend from the company which is only paid to the shareholder, who has substantial interest in the concern. The above provisions also therefore contemplate deemed dividend being taxed in the hands of a shareholder only. For the reasons stated above, we are of the view that the law laid down in the case of Nikko Technologies (I) (P) Ltd. (supra) is not correct. We therefore hold that deemed dividend under s. 2(22)(e) of the IT Act, 1961 can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other person. 41. In the light of the above discussion, the questions referred to the Special Bench are answered as follows : On the first question : 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. On the second question : The expression shareholder referred to in s. 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the benefici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er company advanced an amount of ₹ 36.10 lakhs and ₹ 15.00 lakhs respectively. The CBDT issued the circular in 1987 and subsequently, there are number of decisions rendered by various courts interpreting the statute and held that deemed dividend should be taxed in the hands of the shareholder and not in the hands of recipient concern. The Circular No. 495 is not binding on the courts and lower courts have to follow the judgements of higher judiciary as matter of judicial discipline. However, Ld. AR argued that the said Circular is a beneficial circular, but, as observed from the Circular, it is not a beneficial or benevolent circular, but, it is only a clarificatory in nature. Since the issue has been settled by Hon ble special bench and approved by Hon ble Delhi High court, the judgements of courts are binding and as held by the Hon ble Delhi High Court, once we find that the loan or advance is not taxable in the hands of such concern and should be taxed in the hands of shareholder and that is a correct legal position according to us, such a circular would be of no use. Further, Circulars are not binding on the courts. Accordingly, we dismiss this ground of assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mechanism, observed on taxing of goodwill under capital assets for which no cost of acquisition was available. For computing capital gains as per section 45, the cost of acquisition along with indexation required to be reduced and in the absence of cost of the asset mode of computation was not explained and hence the computation mechanism fails. Therefore, the case law relied up on by the assessee is not applicable to the case of the assessee. The dividend is always distributed to the shareholders of the company and the entire advances or loans given to such concerns of shareholders with substantial interest should be brought to tax to prevent unauthorized distribution of dividend to the controlling shareholders in the guise of loans and advances.. In the asssessee s case, both the assessee and her husband are having more than 10% share holding in M/s Caspian Capital and Finance Pvt. Ltd., and also share holders in the companies borrowing companies having more than share holding of 20%. There is no other shareholder who is having substantial interest in both the payer company and the recipient companies have been brought on record before us by the ld. AR. Therefore, we hold that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al owner of shares carrying not less than 20 per cent of the voting powers. In the case in hand, the assessee is having 45 per cent of shareholding of the borrowing company. Therefore, by applying the parameters as per section 2(32) and Explanation to section 40A(2) as well as any other parameters in general, the assessee is having substantial interest in the borrowing company, i.e., Oryx. [Para 7-8] Since the assessee is a shareholder of the lending company and also having a substantial interest in the borrowing company, the conditions as prescribed under section 2(22)(e) are satisfied to include the payment in question within the ambit of 'dividend' to be taxed in the hands of the assessee. The contention of assessee that only a proportionate amount of loan received by the borrowing company can be assessed as dividend in the hands of the assessee to the extent of his shareholding in the borrowing company cannot be agreed with due to the simple reason that as per provisions of section 2(22)(e) the two conditions are required to be fulfilled, viz., the person having not less than 10 per cent of voting power in the lending company and a substantial interest in the borr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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