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TMI Blog2012 (7) TMI 1146X X X X Extracts X X X X X X X X Extracts X X X X ..... hearing of this appeal. 2. Facts, in brief, as per relevant orders are that return declaring income of ₹ .20,71,353/- filed on 31 Oct, 2006 by the assessee, was processed on 31st March 2007 u/s 143(1) of the Income Tax Act 1961, (hereinafter referred to as the Act ). Subsequently, the return was revised on 8th March, 2008 declaring income of ₹ .21,93,686/-. Later ,an intimation was received by the Assessing Officer(AO in short) regarding taxation of deemed dividend in the hands of the assessee from Addl. CIT,Range-24 on 26.2.2009.Consequently, the AO issued a notice u/s 148 of the Act on 3rd July, 2009, after recording the following reasons in writing: During the course of the reassessment proceedings for the AY 2006-07 in the case of M/s Shiva Commodities Derivatives, the AO(Addl. CIT Range-24,New Delhi) observed and informed vide letter F no. Addl. CIT Range-24/2008-09/558 dated 26.2.2009 that M/s Jai Siyaram Commodities Trading Pvt. Ltd. had advanced a loan of ₹ 1 crore to the firm ,he also observed that all the conditions required u/s 2(22)(e) of the Income-tax Act were applicable in the case of M/s Shiva Commodities Derivatives. In this rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... never received the money. 6.The issue has been decided by the Special Bench of the Mumbai Tribunal which had the occasion to consider the provisions of Section 2(22) (e) of the Act and its applicability in ACIT vs Bhaumik Colour (P) Ltd. (2009) 27 SOT 270 (Mum) (SB). The Special Bench has also considered Circular No. 495 of 22.09.1987. In the case before the Special Bench, the facts of the case were that the assessee company took an interest bearing loan of Rs. 9 lacs from another company, M/s Umesh Pencils (P) Ltd. (UPPL). It was observed by the AO that though the assessee was not a shareholder of UPPL, yet both the companies had one common shareholder i.e. Narmadaben Nandlal Trust (NTT) and that the said trust was holding 20% shares in the assessee company and 10% shares in UPPL. Thus, the AO took the view that the impugned transaction of loan was covered by the provisions of Section 2(22) (e). The assessee s contentions in this regard were that the aforesaid shares were held in the name of 3 trustees of NNT for and on behalf of the trust, that the beneficiaries of the trust NNT were 5 in number and as such to invoke the provisions of Section 2(22)(e),NNT must be both a regist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to a concern from the company and the person who can control the affairs of the concern can draw 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 under section 5(1)(b) in the hands of the shareholder only and not in the hands of the payee, viz., non-shareholder (Concern). Section 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 non-shareholder, viz., the concern. 37. The definition of Dividend under section 2(22)(e) of the Act is an inclusive definition. Such inclusive definition enlarges the meaning of the term Dividend according to its ordinary and natural mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not fall within the definition may possibly regarded as dividend within the meaning of the Act unless the context negatives that view. The contention of the D.R. that provisions of section 8(a) of the Act creates a fiction by which even payments to non-shareholders can be construed as dividend cannot be accepted. Those provisions merely fix the year in which dividend has to be taxed. It is therefore clear that the shareholder alone can, if at all, be subjected to tax for having earned dividend. 39. In the decision of the Tribunal in the case of Nikko Techno-logies (I) (P.) Ltd. (supra) reliance has been placed on Circular No. 495, dated 23-9-1987 which states as follows :- Further deemed dividend would be taxable in the hands of the concern, where all the following conditions are satisfied. . . . We are of the view that Circular of CBDT to the extent that they do not tone down the rigor of the provisions of the Act in the sense to the extent they are not benevolent are not binding. 40. Apart from the above, it is also noticed that section 2(22)(e)(iii) provides relief to a shareholder as follows :- Dividend does not include :- (i) (ii) ****** (iii)any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 substantially interested by way of an advance or loan to a shareholder or to any concern to which such shareholder is a member or partner, subject to the fulfillment of the requirements which are spelt out in the provision. Similarly, a payment made by a company on behalf, of for the individual benefit, of any such shareholder is treated by clause (e) to be included in the expression dividend . Consequently, the effect of clause (e) of section 2(22) is to broaden the ambit of the expression dividend by including certain payments which the company has made by way of a loan or advance or payments made on behalf of or for the individual benefit of a shareholder. The defi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Commodities Trading (P) Ltd., by way of deemed dividend in terms of provisions of sec. 2(22)(e) of the Act. The AO brought to tax the amount in the hands of the assessee in view of findings of the ITAT in their decision dated 6.6.2008 in Ankitech Pvt. Ltd. vs. JCIT in ITA no. 388/Del/2007 while the ld. CIT(A) deleted the addition ,following the view taken by the ITAT in Bhaumik Colour (P) Ltd (supra) and Hon ble Bombay High Court in Universal Medicare Pvt. Ltd. (supra).Indisputably, the amount of loan of ₹ 1 crore was received by M/s Shiva Commodities Derivatives, a firm from M/s Jai Siya Ram Commodity Trading (P) Ltd.. The assessee is having 50% interest in M/s Shiva Commodities Derivatives, a partnership firm and holding 2/3rd of aggregate shareholding in M/s Jai Siya Ram Commodities Trading (P) Ltd.. A mere glance at the impugned order reveals that the ld. CIT(A) did not care to ascertain the amount of accumulated profits on the date of loan or advance nor recorded any findings on the nature of loan or advance. In fact, even the date of loan or advance is not evident from the impugned order what to talk of accumulate profit on that date .In order to bring within the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year to year. Profits can accumulate even within a single year. In CIT v. John, 181 ITR 1 (Ker.) , it was held that sec. 2(22)(e) of the Act ropes in payments to the extent of the accumulated profits possessed by the company. Profits become a part of an accumulated profit only on its recognition and by an act of appropriation and not automatically. Current profit does not become part of accumulated profit till such time it is appropriated by an act of the company, which act may be passing of a mere book entry. A profit, though earned, becomes accumulated profit only on its recognition in books of account as a profit, otherwise available at the disposal of the shareholders. In Smt. Meena Talukdar v. ITO, 15 TTJ 379 (Cal.), it was held that the expression accumulated profits used in Explanation 2 to S. 2(22)(e), should include all profits of the company up to the date of distribution or payment. In other words, the phrase accumulated profits included current profits up to the date of advance and that the law itself contemplated fictional current profits up to the date of distribution or payment to be part of the accumulated profits and that by the very nature of fiction create ..... X X X X Extracts X X X X X X X X Extracts X X X X
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