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TMI Blog2019 (11) TMI 1142X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholder. On 10.01.2013, search and seizure operations were carried out in the residential and business premises of the petitioner, by the Income Tax Department under Section 132 of the Income Tax Act (hereinafter referred to as 'the Act'). During the course of the search, the Department seized cash to the extent of Rs. 35 lakhs from the residential premises of the petitioner. In pursuance to the search, the jurisdictional Assessing Officer issued a notice dated 30.09.2013 to the petitioner under Section 153A, r/w. Section 153 C of the Act, for the assessment years 2007-2008 to 2012-2013. The petitioner had responded to the said notices by filing the Returns of Income for each of these years on 28.02.2014. The petitioner had also filed the Returns of Income for the assessment years 2013-2014 under Section 139 of the Act on 30.09.2013. b) Pending the assessment of her income for the assessment years 2007-2008 to 2012-2013 under Section 153 C and for the assessment year 2013-2014 under Section 143 of the Act, the petitioner had made an application under Section 245 C of the Act for settlement of her cases. The petitioner offered the income of Rs. 35 lakhs seized from he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not taxable as per the provisions of Section 10 (34). d. Since there were more than two shareholders in the assessment years 2012-2013 and 2013-2014 namely, the petitioner and M. Ramasamy, the provisions of Section 2(22)(e) cannot be applied for those years as the computation mechanism fails. e. Even assuming that the amount advanced for the first time by RSPL to RTPL is treated as deemed dividend, any transfer of money by RTPL to RSPL and subsequent repayment by RSPL to RTPL thereafter should not be taxed as deemed dividend. As such by adjusting such payments by RTPL to RSPL, deemed dividend ought to have been limited to Rs. 35,47,20,422/- as against Rs. 137,19,75, 000/-. f. No incriminating material was found during search in relation to the deemed dividend and thus the proceedings under Section 153 A r/w. 153 C are not valid. Though this argument was advanced before the Commission, the issue was not adjudicated. 5. In support of all the aforesaid contentions, the learned Senior counsel for the petitioner relied on various decisions, which I shall address while discussing such contentions. 6. Substantiating the findings of the Commission in the impugned order, Mr.A.P. Sr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MAINTAINABILITY OF WRIT PETITION AGAINST ORDER OF SETTLEMENT COMMISSION 9. Before addressing the various submissions put forth by the petitioner, it would be necessary to address a preliminary objection raised by the learned Standing counsel for the respondent on the jurisdiction of this Court under Article 226 of the Constitution of India to deal with an order passed by the Settlement Commission under Section 245 D (4) of the Act. 10. By relying on the decisions of the Hon'ble Apex Court in the case of Jyotendrasinhji Versus S.I. Tripathi and others reported in (1993) 201 ITR 611 (SC); C.A. Abraham V. ACIT in 255 ITR 340; and Mathurbhai Bhimjbhai Rudani V. ITSC in 37 Taxman.com 333 Gujarat High Court, the learned Standing counsel submitted that the decision making process alone can be challenged and not the decision itself. Even otherwise, piecemeal acceptance of the Settlement Commission's order and a challenge to the remaining portion is impermissible. 11. The various arguments advanced by the learned Senior counsel for the petitioner, which have been extracted above, are to the effect that the impugned order of the Commission is not in accordance with the provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itute a separate and independent category. Reference in this behalf may be had to the decision of this Court in Sri Ram Durga Prasad v. Settlement Commission 176 I.T.R. 169, which too was an appeal against the orders of the Settlement Commission. Sabyasachi Mukharji J., speaking for the Bench comprising himself and S.R. Pandian, J. observed that in such a case this Court is " concerned with the legality of procedure followed and not with the validity of the order.' The learned Judge added 'judicial review is concerned not with the decision but with the decision-making process." Reliance was placed upon the decision of the House of Lords in Chief Constable of the N.W. Police v. Evans, [1982] 1 W.L.R.1155. Thus, the appellate power under Article 136 was equated to power of judicial review, where the appeal is directed against the orders' of the Settlement Commission. For all the above reasons, we are of the opinion that the only ground upon which this Court can interfere in these appeals is that order of the Commission is contrary to the provisions of the Act and that such contravention has prejudiced the appellant The main controversy in these appeals relates to the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business as corporate loans to RTPL. It is nobody's case that the petitioner claimed a portion of the sum of Rs. 35 lakhs offered as income, to be taxable. Hence the contention of the learned Standing counsel for the Department that a piecemeal challenge to the Settlement Commission's order is not maintainable, cannot be sustained. As such, this Court is of the view that the challenge to the impugned order of the Settlement Commission by invoking Article 226 of the Constitution of India in this Writ Petition, is maintainable. 15. I shall now address the various grounds raised and deliberated by the respective counsels. RELEVANCE AND VALIDITY OF CDBT CIRCULARS: 16. The learned Senior counsel for the petitioner, would place reliance on two Circulars issued by the Central Board of Direct Taxes (CBDT). While Circular No. 19 of 2017 directs that advances in nature of commercial transaction would not fall within the ambit of Section 2(22)(e) and that no appeals be filed by the Department on this ground and those already filed shall be withdrawn or not pressed upon, Circular No. 495 of 1987 directs that deemed dividend will be taxable in the hands of the concern were loan/advances are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued a circular dated 20th of June, 1978 withdrawing with immediate effect the earlier circular of 6th of October, 1952. The reason for the withdrawal of the circular of 1952 is set out in the circular of 20th of June, 1978. The reason is stated thus: "the Board has been advised that where accounts are kept on mercantile basis, interest thereon is taxable irrespective of whether the interest is credited to suspense account or to interest account. The Kerala High Court has also expressed the same view in the case of State Bank of Travancore v. Commissioner of Incometax, Kerala [110 ITR 336]. The amount of such interest is, therefore, includible in the taxable income." The withdrawal of the circular of 6th of October, 1952 which had been in force for thirty six years was on account of the decision of the Kerala High Court in State Bank of Travancore v. Commissioner of Income-tax, Kerala (Supra). The Central Board of Direct Taxes, however, issued another circular of 9th of October, 1984 under which the Central Board of Direct Taxes decided that "interest in respect of doubtful debts credited to suspense account by the banking companies will be subjected to tax but interest char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given to the Board for the purpose of proper and efficient management of the work of assessment and collection of revenue to issue from time to time general or special orders in respect of any class of incomes or class of cases setting forth directions or instructions, not being prejudicial to assessees, as the guidelines, principles or procedures to be followed in the work relating to assessment. Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board thus has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under Section 119 of the Income-tax Act which are binding on the authorities in the administration of the Act. Under Section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. Thus, the authority which wields the power for its own advantage under the Act is given the right to forego the advantage when required to wield it in a manner it considers just by relaxing the rigour of the law or in other permissible manners as laid down in Section 119. The power is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which came into force on 1st of April, 1955. The Government, however, realised that the operation of Section 12(1B) would lead to extreme hardship because it would have covered the aggregate of all outstanding loans of past years and would impose an unreasonably high liability on the shareholders to whom the loans might have been advanced. The Minister, therefore, gave an assurance in Parliament that outstanding loans and advances which are otherwise liable to be taxed as dividends in the assessment years 1955-56 will not be subjected to tax if it is shown that they had been genuinely refunded to the respective companies before 30th of June, 1955. Accordingly, a circular was issued by the Central Board of Revenue on 10th of May, 1955 pointing out to all income tax officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions and not bring them within the mischief of the new provision. The officers, therefore, were asked to intimate to all the companies that if the loans were repaid before 30th of June, 1955 in a genuine manner, they would not be ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars to ensure a proper administration of the fiscal statute and such circulars would be binding on the authorities administering the Act. In the case of C.B. Gautam v. Union of India and Ors. (1993 (199) ITR 530 at page 546) a Bench of five judges of this Court considered as enforceable, Instruction No.1A88 issued by the Central Board of Direct Taxes relating to the enforcement of the provisions of Chapter XX-C of the Income-tax Act. The Central Board pointed out in the said instruction that in administering the provisions of the said Chapter, it has to be ensured that no harassment is caused to bona fide and honest purchasers or sellers of immovable property and that the power of preemptive purchase has to be exercised by the appropriate authority only when it has good reason to believe that the property has been sold at an undervalue and there is payment of black money in the transaction. The instruction that when the property is put up for sale by the appropriate authority, the reserve price should be fixed at a minimum of 15% above the purchase price shown as the apparent consideration under the agreement between the parties, was held to be binding on the authority. The Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghese v. Income Tax Officer (supra) also do not appear to have been pointed out to the Court. Since the later circular of 9.10.1984 was not pointed out to the Court, the Court naturally proceeded on the assumption that the benefit granted under the earlier circular was no longer available to the assessee and those circulars could not be resorted to for the purpose of overcoming the provisions of the Act. Interestingly, the concurring judgment of the second judge has not dealt with this question at all but has decided the matter on the basis of other provisions of law. The said circulars under Section 119 of the Income- tax Act were not placed before the Court in the correct perspective because the later circular continuing certain benefits to the assessees was overlooked and the withdrawn circular was looked upon as in conflict with law. Such circulars, however, are not meant for contradicting or nullifying any provision of the statute. They are meant for ensuring proper administration of the statute, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation to the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the conditions of the circular are satisfied. The circular of 9.10.1984 also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or "sticky" loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received. We do not see any inconsistency or contradiction between the circular so issued and Section 145 of the Income-tax Act. In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to Section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the income tax authorities in a specific situation and, therefore, validly issued under Section 119 of the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed in a decision of the Hon'ble Supreme Court of the High Court. The ratio that the instructions given by the CBDT are binding on the authorities had been reiterated in Hindustan Aeronautics Ltd (supra). What has been clarified in the said case is that such instructions cannot supersede the law declared by the Hon'ble Supreme Court of the High Court. It is in this background that reference was made to the decisions in Navnit Lal C. Javeri and KP Verghese (supra) and a perusal of the observations made in this regard may not be considered of having been distinguished from the position laid down in Hindustan Aeronautics Ltd. Similar findings were rendered in Rattan Melting and Wire Industries. 22. The observations made in Hindustan Aeronautics Ltd are as follows: "However, the learned counsel for the appellant relied on the decisions in Navnitlal C. Javeri v. K.K.Sen, AAC of Income Tax, 56 ITR 198, Ellerman Lines Ltd. vs. C.I.T, 82 ITR 913 and K.P.Varghese vs. ITO, 131 ITR 597, to contend that the circular issued by the Board under Section 119 of the Act is binding on the Commissioner in terms of which he was bound to examine the revision of the appellant on merits and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntent with the circular would mean that the valuable right of challenge would be denied to him and there would be no scope for adjudication by the High Court or the Supreme Court. That would be against very concept of majesty of law declared by this Court and the binding effect in terms of Article 141 of the Constitution." 24. Useful reference could be made to the decision of a Division Bench of the Bombay High Court in the case of Commissioner of Income Tax V. Income Tax Settlement Commission and another [(2014) 364 ITR 410 (Bom)] wherein most of the decisions discussed above were considered and ultimately held that the Circulars of the CBDT have a binding force. 25. Now that, it is found that the Circulars of the CBDT are binding in nature, the consequent issue as to whether the contents of the circulars would allure to the benefit of the petitioner herein, requires consideration. For a proper appraisal, the (relevant) portions of these two Circulars are extracted hereunder: Circular No. 19/2017 "F.No.279/Misc./140/2015/ITJ Government of India Ministry of Finance Central Board of Direct Taxes New Delhi, Dated 12th June, 2017 Sub: Settled View on section 2 (22)(e) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormal course of business between two concerns and the transaction arising in the normal course of business between two concerns and the transaction did not attract section 2(22)(e) of the Act. (CIT, Agra V. Atul Engineering Udyog, Allahabad High Court). 3. In view of the above it is, a settled position that trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word 'advance' in Section 2 (22)(e) of the Act. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and those already filed, in Courts/Tribunals may be withdrawn/not pressed upon. 4. The above may be brought to the notice of all concerned. 5. Hindi version follows. (Neetika Basal) Deputy Secretary to Government of India" Circular No. 495 of 1987: "C.B.D.T. Circulars Subject: The Finance Act, 1987-Explanatory Notes on the provisions relating to direct taxes ... Definition of dividend-Section 2(22)(e): 10.1 Sections 104 to 109 relate to levy of additional tax on certain closely-held companies (other than those in which the public are substantially interested) if they fail to distribute a specified percentage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces are given after 31st May, 1987. These amendments will apply in relation to assessment year 1988-89 and subsequent years. ..." 26. Circular No. 19 of 2017 directs that advances in the nature of commercial transaction would not fall within the ambit of Section 2 (22)(e) of the Act. Accordingly, it was directed therein that appeals may not be filed on this ground by officers of the Department and those appeals already filed may be withdrawn or not pressed. If the directions of the Circular is pressed into service, the transaction between RSPL and RTPL, being in the nature of commercial transaction, would not fall within the ambit of Section 2 (22) (e) of the Act. Likewise, Circular No. 494 of 1987 directs that deemed dividend will be taxable in the hands of the concern were loan or advances are made by a Company to concern with common shareholder. The learned Standing counsel for the respondent had contended that without explaining as to how the transaction between the two Companies constitute ordinary commercial transaction, the petitioner cannot rely on the Circular. 27. In the application before the Settlement Commission, the petitioner herein had specifically stated that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e present case the Tribunal on considering decisions in various cases held as under: " From the ratio laid down in above cases and on the basis of judicial interpretation of words, "Loans" or "Advances", it can be held that section 2(22)(e) can be applied to "Loans" or "Advances" simplicitor and not to those transactions carried out in course of business as such. In the course of carrying on business transaction between a company and a stockholder, the company may be required to give advance in mutual interest. There is no legal bar in having such transaction. What is to be ascertained is what is the purpose of such advance. If the amount is given as advance simplicitor or as such per se without any further obligation behind receiving such advances, may be treated is "deemed dividend", but if it is otherwise, the amount given cannot be branded as "advances" within the meaning of deemed dividend under section 2(22)(e). Just as per clause (ii) of section 2(22)(e), dividend is not to include advance or loan made by a company in the ordinary course of business where the lending of money is a substantial part of the business of the company advance in the ordinary course of carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions where the loan/advance will not be treated as a deemed dividend, but that"s all. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of Section 2(22)(e). We feel that this interpretation of ours is in accordance with the legislative intention of introducing Section 2(22)(e) and which has been extensively dealt with by this Court in the judgment in Raj Kumar"s case(supra). This Court in Raj Kumar"s case (supra) extensively referred to the report of the Taxation Enquiry Commission and the speech of the Finance Minister in the Budget while introducing the Finance Bill. Ultimately, this Court in the said judgment held as under: "10.3 A bare reading of the recommendations of the Commission and the Speech of the then Finance Minister would show that the purpose of insertion of clause (e) to section 2(6A) in the 1922 Act was to bring within the tax net monies paid by closely held companies to their principal shareholders in the guise of loans and advances to avoid payment of tax. 10.4 Therefore, if the said background is kept in mind, it is clear that sub-clause (e) of section 2(22) of the Act, which is pari material with clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench of this Court held thus: "3. The decision of the Calcutta High Court in the case of M.D.Jindal vs. Commissioner of Income Tax (164 ITR 28) was relied upon to counter the objection of the Assessee to the effect that the credit arose out of a business transaction to which the provisions of section 2(22)(e) would not stand attracted. The officer pressed into service clause (ii) of the exclusion to section 2(22)(e) of the Act to 3 state that only ordinary business transactions carried on by companies engaged substantially in the business of money lending would stand excluded from the mischief of section 2(22)(e) of the Act. 4. The Assessee's appeal before the Commissioner of Income Tax (Appeals) (CIT(A) was allowed by order dated 31.08.2004. The account copy of CHPL for the period from 01.04.1997 to 31.03.2002 was examined. It was found that for the period from 01.04.1996 to 30.03.2001, the funds of the Assessee were, in fact, lying with the company and not vice-versa. The Commissioner notes that during 01.04.1996 to 31.03.2000, the quantum of funds of the assessee with the company ranged between 1.5 crores to 6.92 crores and during the previous year relevant to AY 2001-02 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness transaction and has been settled the very next year. There is no individual benefit derived by the Assessee. Moreover, the credit does not satisfy the definition of 'advance' or 'loan'. The fiction thus fails on several counts. The Revenue relies upon the judgment of the Supreme Court in the case of Miss P.Sarada vs. Commissioner of Income Tax (229 ITR 444) and the decision of the Calcutta High Court in M.D.Jindal vs. Commissioner of Income Tax (164 ITR 28). 9. In the first case, the assessee had made withdrawals from out of accumulated profits that were deemed to be dividend u/s 2(22)(e) of the Act. The defence taken was that the withdrawals 6 could be taken to have been paid from out of monies lying to the credit of another shareholder. This was negatived by the Supreme Court. In the present case, there are no withdrawals and as the findings of fact by the lower authorities reveal, the frequency of advances by the Assessee to the company was more than in the reverse. The Calcutta High Court, in the case of M.D.Jindal, dealt with a transaction that was found to be colourable. The concurrent finding of fact in that case was to the effect that the transaction was a device ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of Pradip Kumar Malhotra V. CIT 2001 (338) ITR 538 (Cal) has laid down the factors for testing the transactions between a company and its shareholder in the light of the aforesaid provision (page 545 of 338 ITR): " ... We are of the opinion that the phrase by way of advance or loan' appearing in sub-clause (e) must be construed to mean those advances or loans which a shareholder enjoys for simply on account of being a person who is the beneficial owner of share (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; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such a shareholder, in such case, such advance or loan cannot be said to be a deemed dividend within the meaning of the Act. Thus, for gratuitous loan or advance given by a company to those classes of share holders would come within the purview of section 2(22) but not to the cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the Department would attempt to justify that Circular No. 495 of 1987 runs contrary to the provisions. The learned Counsel also submitted that the reference to a larger Bench in the case of National Travel Services (supra) will not have any inference on this case. It will not be out of place to point out that in National Travel Services one of the learned Judges in the quorum had held that the decision in the case of Ankitech, as upheld by Madhur Housing, was wrongly decided. Nevertheless, since the matter has now been referred to a larger Bench for reconsideration, this Court does not intend to fix the liability of taxation either in the hands of the concern or in the hands of the shareholder, on an assumption that deemed dividend is taxable. In any view of the matter, now that this Court has held that the Circulars of the CBDT have a binding effect, it can be safely held that deemed dividend is not taxable in the hands of the shareholders, without reference to the issue which has been referred to the larger Bench. WHETHER DIVIDEND IS TAXABLE UNDER SECTION 10 (34) OF THE ACT? 34. The definition of the term "dividend" under Section 2 (22) envisages various situations under wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs to the term 'dividend' mentioned in Section 115-O which also falls under Chapter XII-D. The explanation to Section 115-Q was not required if 'deemed dividend' under Section 2 (22) (e) was not referred to in Chapter XII-D. The provision makes a specific reference to unpaid distribution tax by a Company. The explanation to Section 115-Q which existed at the relevant time but was omitted by the Finance Act, 2018 provided that for the purposes of the said Chapter namely, Chapter XIID, which contains Sections 115-O and 115-Q, the expression "dividend" shall have the same meaning, as is given to dividend under Sub Section (22) of Section 2, but shall not include sub-clause (e). Thus, there was no need to omit the explanation to Section 115Q with effect from 01.04.2018, whereby deemed dividend is now payable even on dividend referred to in Section 2 (22) (e) of the Act. 38. On a comprehensive reading of Section 10 (34), 115-O and the explanation to 115Q, it is explicit that dividend is not taxable under Section 10 (34) of the Act, since such dividend would be exempted from tax in the hands of the receiver in terms of Section 10 (34). If Section 10 (34) stipulates that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id additional income-tax under section 115-O of the Act?" 6. On the other hand, learned counsel Mr.Porus Kaka appearing for the assessee submitted that the income generated by way of buy back of shares by the company was in the nature of capital gain. Assessee had offered the same to tax accordingly. If the Revenue contends that the income is in the nature of deemed dividend, the effect of Section 10(34) of the Act would automatically follow. He further submitted that all other assessees who were shareholders of the same company and who formed a common group had made declaration in the income tax returns declaring the gain as a capital gain. The Revenue has not opposed these claims in their cases. The Revenue has isolated the cases of only two assessees for a differential treatment. He 1 (2018) 400 ITR 1(SC) Priya Soparkar 5 7 itxa 387-16-o further pointed out that case of Kamal Imran Panju also arose out of the same arrangement. In said case, the revenue chose not to pursue the issue beyond the level of the Tribunal. On the question of consistency, therefore, he argued that the revenue would be precluded from pursuing the present appeal. 8. Section 2(22) of the Act as is wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pter XIID. In turn, therefore, such deemed dividend would be one which is referred to Section 115-O of the Act. Inescapable conclusion, therefore, Priya Soparkar 8 7 itxa 387-16-o would be that such dividend also would be exempt from tax in the hands of the receiver in terms of Section 10(34) of the Act. 12. The contention of the counsel for the Revenue that the company having not paid such dividend distribution tax, exemption under Section 10(34) should be deprived to the assessee needs to be noted only for rejection. If a certain income is exempt at the hands of receiptant by virtue of statutory provision, unless a provision is made in the statute itself, such exemption cannot be withdrawn only because the payer has not paid tax. The statute has made specific provision for recovery or unpaid tax from the company. In the result, the tax appeal is dismissed." In the aforesaid observations, the Bombay High Court has emphatically held that if certain income is exempted in the hands of the recipient by virtue of statutory provisions, such an exemption cannot be withdrawn only because the payer has not paid the tax, unless such provisions are made in the statute itself. 42. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e computation mechanism would fail, is hypothetical. 46. It is not in dispute that during the assessment years 2012- 13 and 2013-14, there were more than one shareholder holding substantial interest in RSPL and RTPL. The Settlement Commission was also appraised of this fact that there are two shareholders having substantial interest in RTPL. The loan from RSPL was not made directly to the specific shareholder and as more than one shareholder is to be treated as specified shareholder for the purposes of Section 2(22)(e) for the loan from RSPL to RTPL, the Section cannot be applied for the relevant assessment years for the reason that the computation of the Section fails since the Section does not provide making the amount of loan to be added in the hands of more than one shareholder or dividing the amount of loan between specified shareholders in any ratio. Since the computation of the Section itself fails, it necessarily would follow that the charge of the Section for the assessment years 2012-13 and 2013-14 would also fail. 47. The Hon'ble Apex court in CIT Vs. B C Srinivasa Shetty reported in (1981) (128 ITR 294) (SC) had held as follows: "Section 45 charges the profits or ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the whole amount was already taxed in the hands of the petitioner and the present reassessment order of Mr.Ramasamy amounted to double taxation. What was claimed to be a hypothetical situation has now been disproved in view of the reassessment order of Mr.Ramasamy. It is stated that the matter is now pending for adjudication before the ITAT, Chennai. 49. In Govind Saran Ganga Saran V. Commissioner of Sales Tax and others [(1985) 155 ITR 144 (SC)], the Hon'ble Supreme Court had held as hereunder: "Where the turnover of goods declared under Section 14 of the central sales tax act, 1956, to be of special importance in interstate trade or commerce is subjected to tax under the sales tax law of the state, Section 15 of that act prescribes the maximum rate at which such tax may be imposed and requires that such tax shall not be levied at more than one point. If either of these two conditions, which are essential to the validity of an impost by the state on such goods, is not satisfied, the impost will be invalid. In order that tax should not be levied at more than one stage, it is imperative that the sales tax law of the state should specify either expressly or by necessary im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year-end should be the deemed dividend for that particular year and so on for the subsequent years. On the other hand, it is a submission that if loans advanced first by RSPL to RTPL is considered as dividend, any payment made by RTPL to RSPL ought to be considered as loan by RTPL to RSPL. This was made as a specific contention before the Settlement Commission which was ignored, by placing reliance on Tarulata Shyam and P. Sarada (supra). 53. In the decision of the Hon'ble Division Bench of the Madras High Court in the case of Sunil Kapoor V. CIT reported in 63 Taxmann.com 97, the decision of Tarulata Shyam (supra) was considered and ultimately held that the amounts advanced to the assessee during the relevant year, less the amount repaid by the assessee in the same year, would be treated as "deemed dividend" under Section 2(22)(e) of the Act. The relevant observations of the decision reads as follows: "15. Following the view of the Supreme Court in Navnit Lal Javeri's case (supra), the Calcutta High Court, in the case of Smt. Tarulata Shyam & Ors. Vs - Commissioner of Income Tax, West Bengal II, Calcutta (1971 (82) ITR 485 (Cal)), held that tax is attracted at the po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or better clarity, the said portion of the order is extracted hereinbelow :- From the above discussion it emerges clear that the fiction created by section 2(6A)(e) read with section 12(1B) of the Act is inexorably attracted as soon as all the conditions necessary for its application exist in a case. In Navnit Lal's case [1965] 56 ITR 198, 202 (SC) this court, after an analysis of these provisions, listed these conditions, as follows " . . . . . the combined effect of these two provisions is that three kinds of payments made to the shareholder of a company to which the said provisions apply, are treated as taxable dividend to the extent of the accumulated profits held by the company. There three kinds of payments are: (1) payments made to the shareholder by way of advance or loan; (2) payments made on his behalf; and (3) payments made for his individual benefit. There are five conditions which must be satisfied before section 12(1B) can be invoked against a shareholder. The first condition is that the company in question must be one in which the public are not substantially interested within the meaning of section 23A as it stood in the year in which the loan was advanced. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ambit of Section 2 (22) (e) of the Income Tax Act. 18. The object of the Legislature in enacting section 2 (22) (e) is to prevent the escapement of tax by some shareholders. Under section 2 (22) (e) of the Act, by a deeming provision, the Legislature has made payment of any advance or loan to a shareholder a deemed dividend so as to subject such payments to the levy of tax in the hands of the receiver of the said amount. It should be noted that pari materia provision, viz., clause (e) of section 2(6A) of the Act was substituted for the original provision by the Finance Act, 1955, with effect from 1st April, 1955. The object of the provision is to prevent avoidance of tax by the shareholders of a closelyheld company. In such a company, a few shareholders, who effectively control it, can easily exploit its juristic personality, by restraining it from distributing its yearly dividends and thereby accumulating its profits, and thus saving themselves from a higher tax incidence resulting from the distribution of dividend. 19. In such a backdrop, the above provision came to be inserted so as to make any payment made by the company by way of advances and loans to shareholders, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation to the deemed dividend and thus, the proceedings under Section 153A r/w. 153C are not valid. Though this argument was advanced before the Commission, the issue was not adjudicated. To such a contention, the learned Standing counsel submitted that the plea of lack of incriminating material will not arise since the petitioner himself had filed an application before the Settlement Commission to adjudicate the issue of deemed dividend. During the course of search, a specific question in relation to applicability of deemed dividend was put to Senthil Nathan, the husband of the petitioner. 55. It is a fact that that the ground of absence of incriminating material in relation to deemed dividend, was placed before the Settlement Commission but not considered. The petitioner, by letter dated 31.08.2015, had submitted that there was no incriminating material in relation to deemed dividend found during the search and accordingly, no addition can be made under Section 2(22)(e). The said contention was taken note of by the Settlement Commission in paragraph 7.2 of its order but however, had failed to address the issue. 56. The Hon'ble Division Bench of the Bombay High Court in CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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