Income Tax Appellate Tribunal - Mumbai
Page 3 Fashions Pvt.Ltd., Mumbai vs Department Of Income Tax on 1 May, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "C",
MUMBAI
BEFORE SHRI N.V.VASUDEVAN(J.M) AND SHRI RAJENDRA (A.M)
ITA NO. 4909/M/2011(A.Y. 2008-09)
The ITO 10(1) (4), M/s. Page 3 Fashions Pvt. Ltd.,
457, Aaykar Bhavan, 30, Gaurav CHS Ltd.,
4th Floor, M.K.Marg, Vs. Bharat Coal Compound, Bail
Mumbai - 20 Bazar, Kurla (W),
(Appellant) Mumbai - 70
(PAN: AAECP 1850G)
(Respondent)
Appellant by : Shri V.V.Shastri
Respondent by : None
Date of hearing : 01/05/2012
Date of pronouncement : 16/05/2012
ORDER
PER N.V.VASUDEVAN, J.M
This is an appeal by the revenue against the order dated 26/04/2011 of CIT(A)-21, Mumbai relating to assessment year 2008-09. The grounds of appeal raised by the revenue reads as follows:
"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.48,00,000/- assessed in the hands of the assessee as dividend u/s.2(22)(e) of the I.T.Act, 1961 on the ground that the assessee company is not shareholder of the lending company, Jaj International (India) Limited, ignoring the statutory provisions to any concern in which such sharerholder is a member or a partner and in which has a substantial interest' enacted in the second limb of Section 2(22)(e) of the I.T.Act, 1961 by Finance Act 1987 and the legislative intent explained in the Memorandum to tax such income in the hands of assessee 'concern' even after the CIT(A) acknowledged that Rs.48,00,000/- is in the nature of loan and thus can be assessed in the hands of Mr.Ashok P.Shetty and Mr. Shakeel Mirza who are holding 50% each of equity shares of the assessee company Page 3 Fashions Private Limited and also holding 20% each in Jaj International (India) Limited. Thus the assessee 2 ITA NO. 4909/M/2011(A.Y. 2008-09) fulfilled all the conditions of Section 2(22) for being a 'concern' liable to charge of tax on dividend income u/s.2(22)(e) of the I.T.Act, 1961."
2. At the time of hearing none appeared on behalf of the assessee, therefore, we have heard ld. D.R and proceed to decide the issue on merits.
3.. The assessee is a company. It is engaged in the business of textile manufacturing. The assessee had received an advance for supply from M/s. Jaj International India Pvt. Ltd. of Rs. 48.00 lacs. The balance sheet of M/s. Jaj International India Pvt. Ltd. showed that they had accumulated profit of Rs. 1,36,24,820/- as on 31/3/2008. The AO further found the following shareholding pattern of the assessee as well as M/s. Jaj International India Pvt. Ltd.
Shareholding of Assessee as on 31-03-2007 and 31-03-2008:
S.No. Name, Address & PAN No. of shares held
1. Ashok P. Shetty 50%
2. Shakeel Mirza 50%
Total 100%
Share holding of M/s. Jaj International P. Ltd. as on 31-3-2007 And 31-03-2008.
S.No. Name, Address & PAN No. of shares held 1. Ashok P. Shetty 20% 2. Shakeel Mirza 20% 3. Jayakar s. Shetty 20% 4. Jaya K. Poojari 20% 5. Others (4 persons) 100%
It can be seen from the above table that Shri Ashok P.Shetty and Shakeel Mirza were holding shares together to the extent of 40% in M/S.Jaj International P.Ltd. and 100% share capital of the Assessee. Since Shri Ashok P. Shetty and Shakeel Mirza were holding shares in both the assessee as company as well as M/s. Jaj International India Pvt. Ltd. the AO was of the view that the provisions of section 2(22)(e) of the 3 ITA NO. 4909/M/2011(A.Y. 2008-09) Income Tax Act, 1961 (the Act) will be applicable. The relevant provisions of Sec.2(22) of the Act, read as follows:
"Section 2(22) "dividend" includes--
"(e) 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 31-5-1987, 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."
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;
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 According to the AO, the persons holding 40% of the shares of the lender company viz., M/S.Jaj International Pvt.Ltd. also held 100% of the shares of the Assessee and therefore it would be a case where advance or loan by a 4 ITA NO. 4909/M/2011(A.Y. 2008-09) company to a concern in which two shareholders have 100% shareholding in the borrowing company and 40% shareholding in the lender company and therefore the provisions of Sec.2(22)(e) of the Act would be applicable. Viz., the clause "a 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." Accordingly the AO brought to tax a sum of Rs. 48 lacs as deemed dividend in the hands of the assessee.
4.. On appeal by the assessee the CIT(A) deleted the addition made by the AO by following the decision of ITAT in the case of Bhaumick Colour Pvt. Ltd. 313 ITR (AT) 146(SB) (Mum), Hon'ble Bombay High Court in the case of CIT vs. Universal Medicare Pvt. Ltd., 324 ITR 263 (Bom), and Hon'ble Rajasthan High Court in the case of CIT vs. Hill Top, 217 CTR 527 (Raj), wherein it was held that deemed dividend can be assessed only in the hands of a person who is shareholder of the lender company and not in the hands of a person other than the shareholder.
5. Aggrieved by the order of the CIT(A) the revenue has preferred the present appeal before the Tribunal.
6. We have considered the submissions of ld. D.R and are of the view that the order of the CIT(A) does not call for any interference. The Special Bench of ITAT, Mumbai, in the case of Bhaumick 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 5 ITA NO. 4909/M/2011(A.Y. 2008-09) 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 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. 217 CTR 527(Raj). The facts of the case before the Hon'ble Court were as follows. The Assessee was one M/S.Hotel Hilltop a partnership firm. This firm received an advance of Rs.10 lacs from a company M/S.Hilltop palace Hotesls (P) Ltd. The shareholding pattern of M/S.Hillltop Palace Hotels (P) Ltd., was as follows:
1. Shri Roop Kumar Khurana : 23.33%
2. Smt.Saroj Khurana : 4.67%
3. Vikas Khurana : 22%
4. Deshbandhu Khurana: 25%
5. Shri.Rajiv Khurana : 25% The constitution of the firm Hotel Hill Top was as follows:
1. Shri Roop Kumar Khurana: 45%
2. Shri.Deshbandhu Khurana: 55% The AO assessed the sum of Rs.10 lacs as deemed dividend u/s.2(22)(e) of the Act in the hands of the firm because the two partners of M/S.Hotel Hill Top were holding shares by which they had 10% voting power in M/s.Hill Top Palace Hotesl (P) Ltd. They were also entitled to 20% of the income of the firm M/s.Hotel Hill Top. Therefore the loan by M/S.Hill Top Palace Hotels (P) Ltd. To the firm M/s.Hotel Hill Top was treated as deemed dividend in the hands of M/s.Hotel Hill Top, the firm under the Second limb of Sec.2(22)(e) of the Act. The CIT(A) held that since the firm was not the shareholder of the company 6 ITA NO. 4909/M/2011(A.Y. 2008-09) the assessment as deemed dividend in the hands of the firm was not correct. The order of the CIT(A) was confirmed by the Tribunal. On Revenue's appeal before the Hon'ble High Court, the following question of law was framed for consideration.
Whether on the facts and in the circumstances of the case and in law the learned Tribunal was justified in upholding the order of learned CIT(A) deleting the addition of Rs.10 lacs as deemed dividend under Section 2(22)(e) of the IT Act?
The Hon'ble Court held as follows:
"The important aspect, being the requirement of section 2(22)(e) is, that 'the payment may be made to any concern, in which such shareholder is a member, or the partner, and in which he has substantial interest, 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 pad 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 attracted in the hands of the individuals, being the shareholders, and not in the hands of the firm."
32. The aforesaid decision of the Hon'ble Rajasthan High Court which is the only decision of High Court, should be sufficient to answer question No.2 which has been referred to the Special Bench by holding 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 7 ITA NO. 4909/M/2011(A.Y. 2008-09) person other than a shareholder. The argument of the learned D.R. that the Hon'ble Rajasthan High Court did not deal with the second limb of Sec.2(22)(e) of the Act is not correct."
The Special Bench further held as follows:
"34. We are of the view that the provisions of Sec.2(22)(e) does 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 Sec.2(22)(e) of the Act.
35. The intention behind enacting provisions of section 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 became 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 payment by the company is treated as dividend. The intention behind the provisions of section 2(22)(e) is to tax dividend in the hands of shareholder. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which it's shareholder has substantial interest, is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern.
36. The basis of bringing in the amendment to Sec.2(22)(e) of the Act by the Finance 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 8 ITA NO. 4909/M/2011(A.Y. 2008-09) 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 non-shareholder viz., the concern.
37. The definition of Dividend U/s.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 meaning to include even a loan or advance. Any loan or advance cannot be dividend according to its ordinary and natural meaning. The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word "Dividend" is extended to loans and advances to a shareholder or to a concern in which a shareholder 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 Sec.2(22)(e) and in the absence of indication in Sec.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."
Since the Assessee in the present case is not a shareholder in the lender company, we are of the view that the above decision is squarely applicable to the facts of the Assessee's case. Consequently, the appeal by the Revenue is dismissed.
7. In the result, appeal by the revenue is dismissed.
Order pronounced in the open court on the 16th day of May 2012
Sd/- Sd/-
(RAJENDRA ) (N.V.VASUDEVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated 16th May 2012
9 ITA NO. 4909/M/2011(A.Y. 2008-09)
Copy to: 1. The Appellant 2. The Respondent 3. The CIT City -concerned
4. The CIT(A)- concerned 5. The D.R"C" Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.