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TMI Blog2018 (12) TMI 1060X X X X Extracts X X X X X X X X Extracts X X X X ..... gard are not correct. Hence this issue is decided against the assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... eal by the assessee, the CIT(Appeals) confirmed the order of the AO for the following reasons:- "14. Before me, the assessee has filed written submission in which it has came up with new explanation stating that ₹ 400 lakhs received is not loan or advance but it is an inter-corporate deposits received from Micro-finish Pumps Pvt. Ltd. Apart from repeating the same explanation as was done before the Assessing Officer. with case laws. the assessee has not added anything. 15. In view of the above findings. it is very clear that M/s. Micro-finish Trading Pvt. Ltd., (Wherein the directors of the assessee company have substantial interest i.e. shareholding exceeding 20%) has huge accumulated profits as on date of advances of ₹ 400 lakhs made to the assessee company (wherein the directors of M/s. Micro-finish Pumps Pvt. Ltd., are having substantial interest exceeding 20%). As such the said advances of ₹ 400 lakhs amounts to deemed dividend within the meaning of the provisions of sec. 2(22)(e) of the Act, and the same is rightly brought to tax in the hands of the assessee company. In the result, the appeal on this ground is dismissed." 6. Aggrieved by the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstantial 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." Explanation-3 to Section 2(22)(e) is as follows: "Explanation-3: For the purpose 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 percent of the income of such concern;" 9. Section 2(32) defines the expression "person who has a substantial interest in the company", in relation to a company, means 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, carrying not less than twenty percent of the voting power. 10. An analysis of the above provisions shows that there are three limbs to Sec.2(22)(e) which are as follows:- "Any payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above conditions are satisfied then the payment by the company to the concern will be dividend. 12. The Special Bench of ITAT, Mumbai, in the case of Bhaumik Color Labs ITA 5030/M/04, 118 ITD 1 (SB) (Mum), considered the question Whether deemed dividend u/s. 2(22)(e) of the Income Tax Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender? The Special Bench held that 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. The Special Bench on the above issue has observed as follows:- "30. At the outset it has to be mentioned that provisions of Sec.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.1-4-88 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dual 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 section 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 firm, 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 benefit, being such shareholder, the amount is paid by the company to the concern. Thus, the significant requirement of section 2(22)(e) is not shown to exist. The liability of tax, as deemed divided, could be attr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1987 w.e.f 1-4-88 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 drawn the same from the concern instead of the company directly making payment to the shareholder as dividend. The source of power to control the affairs of the company and the concern is the basis on which these provisions have been made. It is therefore proper to construe those provisions as contemplating a charge to tax in the hands of the shareholder and not in the hands of a non-shareholder viz., concern. A loan or advance received by a concern is not in the nature of income. In other words there is a deemed accrual of income even u/s.5(1)(b) in the hands of the shareholder only and not in the hands of the payee viz., non-shareholder (Concern). Sec.5(1)(a) contemplates that the receipt or deemed receipt should be in the nature of income. Therefore the deeming fiction can be applied only in the hands of the shareholder and not the nonshareholder viz., the concern. 37. The definition of Dividend U/s.2(22)(e) of the Act is an inclusive definition. Su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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