Income Tax Appellate Tribunal - Delhi
Acit, New Delhi vs Smt. Indira K.P. Singh, New Delhi on 28 May, 2018
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "C": NEW DELHI
BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
AND
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
ITA No. 5473/Del/2014
(Assessment Year: 2006-07)
ACIT, Vs. Indira K.P. Singh,
Circle-31(1), 14, Aurangjeb Road,
New Delhi New Delhi
PAN: AAYPS2354K
(Appellant) (Respondent)
Revenue by : Shri Amit Jain, Sr. DR
Assessee by: Shri R. S. Singhavi, CA
Shri Satyajeet Goel, CA
Date of Hearing 01/03/2018
Date of pronouncement 28/05/2018
ORDER
PER PRASHANT MAHARISHI, A. M.
1. This appeal is filed by the revenue against the order of The Commissioner Of Income Tax (Appeals) - XX VI, New Delhi dated 25/7/2014 for assessment year 2006 - 07 where in the addition of Rs. 1,87,85, 000/- made by the Ld. Assessing Officer under section 2 (22) (e) on account of deemed dividend is deleted.
2. The revenue has raised following grounds of appeal.
"(i) The CIT(A) has erred in deleting the addition of Rs. 18785000/-
made by the ld AO u/s 2(22)(e) on account of deemed dividend.
(ii) The CIT(A) has erred in holding that the assessee is not a shareholder in M/s. Bravely Park Operation and Maintenance Services P Ltd without appreciating that the assessee was substantial shareholder through various companies.
(iii) The CIT(A) has erred in holding that the assessee was not having any substantial interest in M/s. MHDC without appreciating the fact that he is registered shareholder of the said company."
3. The brief facts of the case is that assessee is an individual who filed return of income for assessment year 2006 - 07 on 30/10/2006 at Rs.
Page | 1 4.09,77,144/-. Subsequently the assessment under section 143 (3) was made on 22/9/2008 at the returned income. Later on notice under section 148 of the income tax act was issued on 30/3/2013 after recording the reason that one company M/s Beverly Park operation and maintenance services private limited has given loan of Rs. 1, 87, 85, 000/- to another company. The lender company has an accumulated profit of Rs. 73, 64, 08, 868/- and in that company the assessee is directly holding 33.33% shares and 32.3% shares through holding companies. In the borrowing company, the assessee is holding 10200 ordinary shares of rupees Rs. 100/- each out of the total equity of 17502 equity shares. As it has been held by the Hon'ble Delhi High Court that deemed dividend is required to be taxed in the hands of the shareholder of the company , to tax the above amount the case of the assessee was reopened.
4. The assessee submitted a letter dated 10/4/2013 in response to the notice under section 148 of the income tax act holding that the original return filed may be considered as return in response to the notice under section 148 of the act. Further, the assessee objected to reopening of the assessment and stated that the above sum has already been taxed in the hands of Madhur housing and development Co Limited, borrower company, for assessment year 2006 - 07. The assessee further supplied various details and submitted before the assessing officer that the reasons recorded are completely wrong, incorrect and ill founded. It was further stated that the provisions of section 2 (22) (e) of the act will only applies when the assessee holds 10% of the voting right in the payer company and hold 20% of the beneficiary owners right in the receiving company. According to the assessee, none of these conditions is satisfied. It was further stated by the assessee that she does not hold any shares in the payer company in his individual capacity for the relevant period consequently she had also did not hold any voting power in the payer company much less holding beneficially at least 10% of the voting power. Hence, in case of the assessee the above condition is not satisfied. Therefore, it was the contention of the assessee that it does not satisfy the condition of the holding of the shares. She further stated that she Page | 2 does not hold requisite number of shares in either the lender company or borrower company, therefore the provision of section 2 (22) (e) of the act does not apply. The Ld. assessing officer rejected the contention of the assessee and proceeded to make the assessment. Ultimately the Ld. assessing officer held that that loan given by Beverly Park operation and maintenance services Ltd to M/s Madhur housing and development Co are clearly deemed dividend income in the hands of the assessee. As the accumulated profits of the lender company is more than the amount of loan received by M/s madhur housing company the whole amount of the loan is liable to be treated as deemed dividend of Rs. 1.87 crores. Consequently assessment under section 143 (3) read with section 148 of the income tax act was passed on 31/1/2014 determining the total income of the assessee at Rs. 1,97, 62, 140.
5. The assessee aggrieved with the order of the Ld. assessing officer preferred an appeal before the Ld. CIT (A) who dealt with the whole issue as under:-
"3. Aggrieved, the appellant filed this appeal raising following grounds:
1.1 That on the facts and in the circumstances of the case and contrary to the provisions of law, the ld Assessing Officer has erred in making an addition of 1,87,85,000/- on account of deemed dividend in the hands of appellant u/s 2(22)(e) of the Act in respect of loan given by BPOM (M/s Beverly Park Operation & Maintenance Services (P) Ltd) to MHDC (M/s Madhur Housing & Development Company).
1.2 That on the facts and in the circumstances of the case and contrary to the provisions Qf law, the learned assessing officer has erred in making an addition of agricultural income of 4,452/- in the total income and taxed the same whereas the agricultural income being exempt from tax should have been considered for rate purpose only.
1.3 That the assessment order passed and additions made are arbitrary, illegal, contrary to the provisions of law and against the past history of the case. The order passed by the learned Assessing Officer is bad in law.
1.4 That the reliance placed by the Assessing Officer on various decisions cited in the assessment order is contrary to the facts of the case of the appellant, and is totally erroneous and misplaced.
Page | 3 2.1 That on the facts and in the circumstances of the case and contrary to the provisions of law, the learned assessing officer has erred in and acted arbitrarily in overlooking the documentary evidence produced before her.
2.2 That the learned Assessing Officer has erred in law in holding that Mr. K.P. Singh is beneficial as well as registered holder of shares.
2.3 That on the facts and in the circumstances of the case and contrary to the provisions of law, the learned assessing officer has grossly erred in taxing the amount of loan in the hands of the appellant as deemed dividend u/s 2(22)(e) of the I. T. Act, 1961 ignoring the provisions of section 10(34) of the I. T. Act, as per which 'dividend' income is totally exempt from tax from the A.Y. 2004-05 onwards.
3. That on the facts and in the circumstances of the case and contrary to the provisions of law, the learned Assessing Officer has erred in initiating penalty proceedings u/s 271(l)(c) of the Income-tax Act, 1961.
4. That on the facts and in the circumstances of the case and contrary to the provisions of law, the iearned Assessing Officer has erred in charging interest u/s 234B of the Income-
tax Act, 1961, amounting to 59,45,061/-.
5. That the order passed by the learned Assessing Officer is wrong on facts and bad in provisions of law.
6. That the appellant craves leave to add, amend, alter, change, vary, substitute or raise any additional ground of appeal if it becomes necessary to do so in the interest of justice at the time of hearing."
4. Shri Anil K. Aggarwal, CA, the Authorized Representative (AR) of the appellant was heard. The core issue, raised vide grounds 1.1 to 2.3 is chargeability of the deemed dividend of Rs.1,87,85,000/- u/s 2(22)(e). The Ld. AR argued this issue by reiterating the content of his submission. The relevant portion thereof covering all the arguments put forward during the appellate proceedings, is reproduced here under:
'' Factual details:
....Facts of the appellant's case are that the assessee is a not a shareholder of the payer company namely M/s Beverly Park Operation & Maintenance Services (F) Ltd. Further, in the payee company namely M/s Madhur Housing & Development Company; he was holding 364S shares of 100 each, which were of the category 10% non-cumulative preference Shares. These shares were with voting right but with fixed rate of dividend. Apart from these Page | 4 shares, the appellant held 10200 ordinary shares jointly with M Indira K.P. Singh, which were with non¬voting right. Furthermore, these all shares were held in their name on behalf of the partnership firm M/s General Marketing Corporation, both of them being two of its 11 partner.
6. /\s is clear from the above facts, the appellant was not a shareholder in the payer company. Therefore, the loans given by the said payer company to M/s Madhur Housing & Development Company cannot be treated as 'dividend' under section 2(22)(e) of the Act either in the hands of the receiving company or the appellant, for that matter since the transaction would be termed as dividend only when the appellant will hold 10% of the voting right (both registered and beneficiary shareholder) in the payer company namely M/s Beverly Park Operation & Maintenance Services (P) Ltd and also hold 20% beneficiary owner right (both registered and beneficiary shareholder) in the receiving company called M/s Madhur Housing & Development Company, which is not the case.
7. In support of the above facts, the shareholding pattern of the payer company is given herein below:
Shareholding status and position of voting right of different shareholders in the paver Company- M/s Beverly Park Operation 8s.
Maintenance Services CP) Ltd
Type of Voting/No Number of Amount
Name of Shareholder n Voting shares held (Rs.)
Share Right
Vanutsar Properties (P) Equity
held Voting Right 19,997 1,99,970
Ltd
A. P. Garg & Vanutsar
Equity Voting Right 1 10
Properties (P) Ltd
Hari Haran & Vanutsar
Equity Voting Right 1 10
Properties(P) Ltd
Adesh Gupta & Vanutsar
Equity Voting Right 1 10
Properties (P) Ltd
Raj Arora & Vanutsar Equity Voting Right 1 10
Properties (P) Ltd
Y.N.Sharma & Vanutsar 1
Equity Voting Right 10
Properties (P) Ltd
Sanjay Goenka &
Vanutsar Properties (P) Equity Voting Right 1 10
Ltd.
Page | 5
Indira K.P.Singh Equity "A" Non Voting 10,000 1,00,000
Right
Total Equity 30,003 3,00,030
Shares(A)
12% 3,00,000
Vanutsar Properties (P) Preference Non Voting
Shares @ Right 3,000 \
Ltd
Rs. 100/-
each i
Total Preference 3,000 3,00,000
Shares(B)
Grand Total (A+B) 33,003 6,00,030
On perusal of the above table, it is dear that the appellant did not hold any shares i.e. (equity or preference) in the payer company called M/s Beverly Park Operation & Maintenance Service (P) Ltd in his individual capacity for the relevant period. Consequently, he also did not hold any voting power in the payer company, much less holding beneficially at least 10% voting power. So, in the assessee's case, the above condition is not satisfied.
Shareholding status and position of voting right of different shareholders in the receiving Company i.e. M/s Madhur Housing & Development Company Ordinary class of Name of Voting/Non Number Amount shares of Rs.100/- Shareholder Voting of of each. Right shares Capital held invested Ordinary Mr. K.P.Singh & firs. Non-Voting 10200 1020000 s Indira K.P.Singh (on Right behalf of M/s General Ordinary" A" Marketing Corporation Vishal Foods & Voting 100 10000 ) Right Investments (P) Ltd Ordinary "A" DLF Voting 102 10200 Right Investment (P)Ltd Ordinary "A" Kohinoor Real Voting 100 10000 Right ' Estate Company -
Ordinary "B" Mrs. Renuka Talwar Non Voting 7000 700000 Right Total Equity Shares (A) 17,502 17,50,200 j 15% Non Cumulative Mrs. Indira K.P. Voting Right 1,000 1,00,000 Preference Shares of Rs. Singh But fixed 100/-each rate of dividend Page | 6 15% Non Cumulative Mr. K.P.Singh Voting Right 3,648 3,64,800 Preference Shares of Rs. But fixed 100/- each rate of dividend Total Preference 4,648 4,64,800 shares(B) 22,150 22,15,000 Grand Total (A + B) On perusal of the above table, it is clear that the assessee was holding only 3648 numbers of 15% Non cumulative preference shares of 100/- each fully paid up of M/s Madhur /Housing & Development Company (receiving company) in his individual capacity. However, the Preference shares are entitled to fixed rate of dividend and in view of this position, the said holding is not covered for the purpose of calculation of deemed dividend as per section 2(22)(e) read with section 2(32) of I T Act.
9. The assessee does not hold any equity shares in his individual capacity. The ordinary 10200 shares having "Non-voting Right" of 100/- each were held by assessee i.e. Mr. K. P. Singh (the assessee) and M Indira K.P. Singh on behalf of M/s General Marketing Corporation (GMC). in which the assessee is one of the 11 partner These shares were held in the names of two of the partners, as a partnership firm cannot legally hold share in companies.. These shares are, therefore. not beneficially held by the assessee & M Indira K. P. Singh nor does any of them has any voting right in their individual capacity on the basis of equity shares actually owned by the partnership firm M/s General Marketing Corporation. Moreover, these equity shares registered in their names are with non-voting right.
10. /Is is apparent from the above details, the appellant neither holds any shares in individual capacity in the paver company i.e. M/s Beverly Park Operation & Maintenance Services (P) Ltd nor any voting power therein. Further neither the assessee nor Mrs Indira K. P. Singh hold any voting power in the shape of equity shares in the receiving company i.e. M/s Madhur Housing & Development Company.
11. Details and documentary evidence i.e. the audited balance sheet of M/s General Marketing Corporation for the period ended 31.03.2006 highlighting the above said holding, a copy of FORM NO- I , II & III filed under section 187 C(l) of the companies Act, 1956 i.e. (Form-I declaration filed by M Indira K.P. Singh and Mr. K.P. Singh / Form -II filed by M/s Genera! Marketing Corporation beneficiary owner/FORM-III filed by M/s Piadhur Housing and Development Co) with ROC in respect of 10200 equity share issued in the name of M Indira K. P. Singh and Mr. K. P. Singh as partners for and on behalf of M/s General marketing Corporation were Page | 7 produced before the learned assessing officer which is a matter of record.
12. The learned assessing officer has overlooked all the documents produced before him and also the facts of the case that Mr. K.P. Singh (the assessee) and Mrs Indira K. P. Singh were not a beneficiary owner of the shares. The shares were allotted to M/s General Marketing Corporation and registered in their names as firm's the same could not be registered in the name of the firm. The shares held by them in a fiducially capacity and all income generated i.e. dividend / bonus on these shares is the income of M/s General Marketing Corporation and not their.
13. The transaction of loan. for falling in the definition of 'dividend' as per section 2(22)(e) of the Act, it is necessary that both the conditions i.e. that of being a beneficial holder of shares of the paver company holding of not less than 10% of voting power therein and again that of the shareholder being a member or a partner in a receiving company having a substantial interest therein should be co-existent and not only one of the above two conditions is sufficient to hold the loan amount as deemed 'dividend'. Mercifully, neither of the two conditions exists in the case of the appellant.
14. The payment of 1.87.85.000/- made by M/s Beverly Park Operation and Maintenance CP) Ltd to Madhur Housing & Development Company was against the issue of debentures. It cannot be treated as dividend in the hands of the assessee. /as the facts stand, the assessee is not a shareholder, at alt, in the company giving loan. Hence, there is no scope for holding the amount of transaction as 'dividend' u/s Section 2(22)(e) of the I.T. Act. This is without prejudice to our submissions that the payment, in question, is in lieu of allotment of debentures and is in the ordinary course of business, hence is outside the scope of Section 2(22)(e) of the I.T. Act.
15. Even if the amount of loan given by M/s Beverly Park Operation and Maintenance (P) Ltd to Madhur Housing & Development Company is held as 'dividend' as defined in section 2(22)(e) of the Act, dividend is a not-taxable receipt as per section 10(34) of the Income Tax Act, 1961, the provisions of which section are fully applicable to the assessment year 2006-07. which is under consideration. Section 2 of the Act captioned as 'Definitions' is only a defining section rather than being a charging section. So, the addition made treating the inter-corporate loan as 'dividend' in the hands of appellant does not give rise to an occasion to make an addition in his case under any provision of the Act. The AO has failed to pin-point any section, which authorised her to make addition of 'dividend' in the hands of the appellant in the face of the clear-cut provisions of section 10(34). declaring the dividends as exempt from charging of any tax. "
Page | 8 4.1 On merit, it was further submitted as under:
" 5.2.1 It is, however, stated that the findings of Ld. AO are totally misplaced and unwarranted, based as these are on wrong facts. He is totally in the wrong in concluding that the appellant is a shareholder in the payer company namely M/s Beverly Park Operation and Maintenance Services (P) Ltd and that he was holding more than 10% of the voting power in the said company. Further, his finding that the appellant and M Indira K.P. Singh were holding more than 20% of the voting power in the Madhur Housing & Development Company is equally wrong.
5.2.2 The fact is that
(a) the appellant is a neither a shareholder of the payer company namely M/s Beverly Park Operation & Maintenance Services (P) Ltd., nor does he hold any voting power in the said company. So, there is no question of his holding more than 10% of its voting power.
(b) Further, in the payee company namely M/s Madhur Housing & Development Company;
(b-1) he was holding 3648 shares of Rs. 100 each of the category '15% non-cumulative Preference Shares'. These shares were with voting right but with fixed rate of dividend.
(b-2) Apart from these shares, the appellant held 10200 ordinary shares jointly with Mrs. Indira K. P. Singh, which were with non- voting right. Furthermore, these all were held in the names of Shri K.P. Singh and M Indira K. P. Singh strictly in their representative capacity (as partners of M/s General Marketing Corporation). They held the said shares on behalf of the partnership firm M/s General Marketing Corporation, both of them being two of its 11 partners, simply because of the fact that a firm cannot hold the shares in its name. It was the partnership firm M/s General Marketing Corporation, which actually held these shares and was a shareholder of M/s Madhur Housing & Development Company, in that wav, and not the appellant or M Indira K. P. Sin oh.
5.3 The provisions of section 2(22)(e) of the I.T. Act, 1961 read, Section 2(32) of the I. T. Act, 1961, which is also relevant is reproduced herein below:
" 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 per cent of the voting power."
5.3.1 As per the above legal parameters, a payment vjould acquire the attributes of a dividend within the meaning of the provision of Page | 9 Section 2(22)(e) of the Act, if the following conditions are fulfilled:
--
(i) The company making the payment is one in which public are not substantially interested.
(ii) Money should be paid by the company to a shareholder holding not less than 10 per cent of the voting power of the said company (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits). It would make no difference if the payment was out of the assets of the company or otherwise.
(iii) Money paid should be in the nature of loan or advance to such shareholder.
(iv) Or money should be paid by the company to any concern in which such shareholder (i.e. the shareholder having not less than 10 per cent of the voting power of the said company) is a member or a partner and in which he is substantially interested i.e ha vino beneficial ownership 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."
(v) The money paid to the said concern may be 'any payment' which the company may make on behalf of or for the individual benefit of any shareholder.
(vi) And lastly, the limiting factor being that these payments must be to the extent of accumulated profits, possessed by such a company.
In the above concern, the appellant did not hold any equity shares in his individual capacity. The ordinary 10200 share having- "Non- voting Right" of 100/- each were being held by the assessee & Mrs Indira K. P. Singh on behalf of M/s Genera! Marketing Corporation (GMC), in which the assessee one of the 11 partners (copy of Partnership deed is enclosed as Annexure-D). Since a partnership firm cannot legally hold share in companies, the shareholding of the partnership firm in MHDC (receiving company) was registered in the name of two of the partners i.e. Mrs Indira K. P. Singh and Mr. K. P. Singh. These shares are, therefore, not beneficially held by the assessee & Mrs Indira K. P. Singh nor does any of them has any voting right in their individual capacity on the basis of equity shares actually owned by the partnership firm M/s General Marketing Corporation. To top it all, these equity shares are with non-voting right.
It is further to be submitted that a person holding shares on behalf of anybody else is required to make certain statutory declarations. In fact, such declarations are to be made both by the persons concerned and the company. So, in proof of the representative Page | 10 capacity, in which the equity shares of M/s Madhur Housing & Development Company are held by assessee and M Indira K. P. Singh, we enclose herewith copies of the followings statutory forms filed with the Registrar of Companies under section 187 C(l) of the Companies Act, 1956 in respect of 10200 eguitv shares registered in the name of M Indira K. P. Singh and Mr. K. P. Singh, partners on behalf of M/s General Marketing Corporation with audited balance sheet of General Marketing Corporation (Partnership Firm) for your reference & record as Annexure-E. i.) Form-I being declaration filed by M Indira K.P.Singh and Mr K. P. Singh, registered owne ( Annexure F ) ii.) Form -II filed by M/s General Marketing Corporation, being beneficiary owner of the equity shares.( Annexure G) iii.) Form-Ill filed by M/s Madhur Housing & Development Co. i.e. the company, which issued the equity shares. (Annexure H ) Form -I as filed by the persons in whose names the shares were registered, i.e. Mr. K.P. Singh and M Indira K.P.Singh shows the reasons as to why the shares have not been registered in the name cf the person holding beneficial interest as per the register of the company as "/4s an Association of persons (Firm) cannot become a member of a company, the shares are held in the name of the partner."
Form-II as filed M/s General Marketing Corporation mentions the circumstances, under which the shares were not registered in my (i.e. the firm General Marketing Corporation name as " /Is an Association of persons, firm cannot become a member of a company, the shares are held in the names of partner."
Form-Ill filed by M/s Madhur Housing & Development Co. clearly show the names of Mr. K. P. Singh and M Indira K. P. Singh as the persons in whose names the shares are registered and the name of M/s Genera! Marketing Corporation under the head: Particulars of persons who hold a beneficial interest in such shares.
So, on perusal of the above forms, you will kindiv appreciate that these equity shares have been issued to Mr. K. P. Singh & M Indira K. P. Singh on behalf of M/s General Marketing Corporation as partner. Moreover, these shares do not carry any voting power.
The audited balance sheet of M/s General Marketing Corporation as on 31.03.2006. which is factual and actual beneficial shareholder of M/s Madhur Housing & Development Co. is also enclosed herewith vide Annexure E. In Schedule-3 to the final accounts of the said partnership firm for the period ended on 31.03.2006, the above said holding of 10,200 equity shares of M/s Madhur Housing & Development Co. has been duly reflected. The fact of both M Indira K.P. Singh and Mr. K.P. Singh being two partners out of 11 partners Page | 11 of the said firm is verifiable from Schedule-1 to the Final Accounts already enclosed for your ready reference & records.
5.3.3 So, the provisions of section 2(22)(e) of the I. T. Act, 1961 are not applicable to the case of the appellant because of the following:
The appellant is not a shareholder of the payer company namely M/s Beverly Park Operation & Maintenance Services (P) Ltd. There is no question of his being a 'beneficial owner of shares' of the said company.
The appellant does not hold any voting right in the payer company M/s Beverly Park Operation & Maintenance Services (P) Ltd. There is no question of his holding more than 10% voting right in the said company.
The sum paid by M/s Beverly Park Operation & Maintenance (P) Ltd. amounting to Rs. 1,87,85,000/- was not paid to the appellant. Further, the sum paid was not in the nature of 'advance or loan' paid to a shareholder.
The amount of Rs. 1,87,85,000/- has been paid to M/s Madhur Housing & Development Company. The appellant has no substantial! interest in the said receiving company. Moreover, both the conditions in respect of payer company and the receiving company must be existing for bringing the payment in the ambit of section 2(22)(e). Since the appellant is not a shareholder of the paying company, his having or not having any, substantial interest in the receiving company is of no consequence.
The amount of Rs. 1,87,85,000/- was paid by M/s Beverly Park Operation & Maintenance (P) Ltd. to M/s Madhur Housing & Development Company towards subscription of 3757 number of debentures @ 5000/- each fully paid up. It was an ordinary transaction undertaken in the normal course of business. It cannot be termed as "any payment by any such company on behalf, or for the individual benefit, of any such. shareholder". By no stretch of imagination, this payment could be held as to have been made for the individual benefit of the appellant.
5.3.4 Therefore, the investment of 1,87,85,000/- made by M/s Beverly Park Operation and Maintenance (P) Ltd in the debentures of Madhur Housing & Development Company cannot be treated as dividend in the hands of the appellant. The established law and the facts of the case do not permit this and any attempt to make addition in the hands of the appellant on this account would constitute a high-handed extra-judicial act done in complete negation of the proven facts.
Page | 12 5.4 Moreover, assessment in this case of assessee was originally completed u/s 143(3) of the I. T. Act, 1961 on 14.11.2007 after due scrutiny. All the facts then were before the then Assessing Officer. The facts and figures relating to the impugned transaction of subscription of debentures undertaken between the two group companies namely M/s Beverly Park Operation and Maintenance (P) Ltd to Madhur Housing & Development Company were very much known to the Department. Initially, the Assessing Officer had made addition in the hands of Madhur Housing & Development Company for the A.Y. 2006-07 treating the amount received by it as deemed dividend under section 2(22)(e) of the Act. However. Hon'ble High Court deleted the addition covering the matter by the judgment of the said court dated 11. 05.2011 passed in ITA No. 462/2009LCIT Vs. Ankitech Pvt. Ltd) holding that the assessment cannot be in the hand of the assessee company herein under section 2(22)(e) of the Income Tax Act but it has to be in the hands of the shareholder of the company. So after facing failure in the first attempt of adding this very amount in the hands of the the receiving company, the Assessing Officer then reopened the assessment u/s 148 of the Act of two persons namely Shri K. P. Singh (the appellant) and M Indira K. P. Singh and made addition of the same amount in the hands of the both (resulting into double addition)! This is nothing but a case of change of opinion. Originally, the opinion of the AO was that the impugned amount was deemed dividend in the hands of the receiving company and he made addition accordingly in the hands of the company. When the same was not confirmed in appeal, he changed his opinion to the effect that the impugned amount was deemed dividend in the hands of Sh. K. P. Singh and M Indira K. P. Singh. Proceedings u/s 147/148 are not meant for coming to help of the Department upon change of opinion of the Assessing Officers on a certain matter. Such a proposition wouid be blatant misuse of the provision of reopening of assessments. So, addition in the hands of the appellant made u/s 147/148. in an arbitrary manner, is assailed on this count also.
5.5 Reliance is placed on the following judicial pronouncements:
-Aroni Commercials Ltd. v. DCIT-2(1) (2014) 44 taxmann.com 304 (Bombay)/ (2014) 362 ITR 403 (Bombay), the facts of the case were that the Assessing Officer completed the assessment under section 143(3), after being fully satisfied that 'capital gains' declared by the assessee was a result of investment activity Subsequently, the assessing officer reopened the assessment under section 147/148 recording reasons to the effect that the assessed had so written/manipulated its accounts that normal business profit in share trading was claimed as short-term capital gain so as to attract lower rate of tax. It was averred by Bombay High Court "The concept of change of opinion is excluded/omitted from the words 'reason to believe'. Thus a change of opinion would not be reason to believe that income chargeable to tax has escaped assessment.
Page | 13 Besides the power to reassess is not a power to review. Further reopening must be on the basis of tangible material. (Para 11).
Therefore, the power to reassess cannot be exercised on the basis of mere change of opinion. If all the facts are available on record and a particular opinion is formed, then merely because there is change of opinion on the part of the assessing officer, notice under section 147 and 143 is not permissible. The powers under section 147 and 148 cannot be exercised to correct errors/mistakes on the part of the assessing officer while passing the original assessment order."
- M/s Rasalika Trading & Investment Co. (P) Ltd. v. DCIT(2014) 43 taxman.com371 (Delhi). In this case, it was held by Hon'ble Jurisdiction High Court of Delhi "It is evident from the aforesaid that the reassessment proceedings were initiated by the impugned notice which expressly and plainly states that 'reasons to believe' are based upon the materials contained in the investigation report of 13-3-2006. The notice itself does not spell out that the report was not on the record when original assessment was completed on 24-12-2007. In other words, 'the reasons to believe' do not state even in one sentence that the investigation report was not with the Assessing Officer when he completed the assessment. Therefore, the attempt to reopen the proceedings under section 147 and 148 is really the result of change of opinion. Consequently, the impugned notice and all proceedings further thereto are beyond the authority of law and were liable to be quashed."
-Full bench order of Delhi High Court in the case of CIT v. Kelvinator of Ltd. 256 ITR 1. It is held by their lordships of Hon'bie High Court of Delhi, "An order of assessment can be passed either in terms of sub¬section (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of the said sub-section 3 of section 143, a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in term of clause (e) of section 114 of the Indian evidence Act that the judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to re-open the proceeding without anything further, the same would amount to giving premium to an authority exercising quasi judicial function to take benefit of its own wrong.
"Jindal Photofilms Ltd. v. DCIT: 234 ITR 170(Delhi High Court) in a writ petition against notice u/s 148 averred, "Though he has used the phrase "reasons to believe" in his order, admittedly, between the date of the orders of assessment sought to be reopened and th.e date of forming of opinion by the Income Tax Officer, nothing new has happened. There is no change of law. No new material has come on record. No /information has been received. It is merely a fresh application of mind by the same Assessing Officer to the same Page | 14 set of facts Thus, it is a case of mere change of opinion which does not provide jurisdiction to the Assessing officer to initiate proceedings under section 147 of the Act."
In the case of NTPC v. Dy.CIT (2013) 32 taxmann.com 343 (Delhi)/ 2014) 360 ITR 380 (Delhi), the Jurisdictional High Court of Delhi referred to its earlier decision dated 10.01.2013 in WP(C) 14562/2006 in the matter and held that "We find that the said decision in WP(C) 14562/2006, inter alia held that there was no failure on the part of the petitioner to fully and truly disclose all material particulars necessary for its assessment and therefore, the condition precedent stipulated in the proviso to section 147'had not been satisfied. This court also held that the issuance of the notices under Section 148 of the said Act, in the facts and circumstances of the case, would amount to nothing but a mere change of opinion. It is apparent from the above that apart from the issue of full and true disclosure, this Court had also held that what the revenue 'was seeking to do was to change its opinion, which was impermissible in law. (Para 2).
Same is the case here. We need not examine that aspect of the `matter inasmuch as we have already held that the said decision dated 10.01.2013 covers the present case entirely.
5.6 The impugned transaction entered into by is of Rs. 1,87,85,000/-. Even if this amount is found to be addable to someone's income for one reason or the other, this very amount cannot be added in the hands of two persons at the same time, vrhich, pure and simple, is double addition. The amount involved in the transaction is that of Rs. 1.87,85,000/-. whereas Ld. Assessing Officer has attempted to obtain tax on Rs. 3,75.70,000/- ( Rs. 1,87,85.000 X 2) I Obviously, no law permits the departmental officers to make double additions. His action of making addition of Rs. 1.87.85.000/- in the hands of the appellant as also in the hands of M Indira K.P.Singh is patently wrong and high-handed.
5.7 Your honour kind attention is invited to the decision of the ITAT Special Bench I.T.A .No 5030/ Mum/04 dated 19.11.2008 in the case of ACIT Central Circle Vs. M/s Bhaumik Colour (P) Ltd. In this case, it was held that the expression of shareholders referred to in Sec 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of sec 2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the provisions of sec 2(22)(e) will not apply. The fact of the case is similar to our case.
5.7 The learned assessing officer has cited various decisions which are contrary to the facts of the case of the appellant company and in our respectful submission; these are not applicable to the case of appellant company.
Page | 15 5.8 In view of the above facts, we respectfully submit that the transaction, in question, does not fall in the category of 'deemed dividends'', as defined in section 2(22)(e). Therefore, the addition made on account of deemed dividend u/s 2(22)(e) of the I.T.Act, 1961 in the hand of appellant may kindly be directed to be deleted in full.
5.9 Without prejudice to the aforegoing, even if it is held that the dividend', even then, this amount cannot be held a taxable income in the, hands of the appellant. Section 2 of the Income Tax Act, 1961 is not a charging section. It simply gives definitions of different terms used in the Income Tax Act. Even if any payment comes in the purview of section 2(22)fe) and is accordingly held a "deemed dividend", this in itself is not enough to bring the amount to tax, especially when the dividend income, itself has been made tax free by the Legislature w.e.f. 01.04.2004 i.e. from Assessment Year 2004-05 onwards.
Section 10 titled "Incomes which do not form part of total income' enumerates therein the tax free receipts. Section 10(34) shows "any income by wav of dividends referred to in section 115-0". So, when dividends, by themselves are not taxable, how deemed dividends (the receipts taken to be or considered to be dividend) can be held taxable in total disregard of the existing tax laws.
5.10 The assessing officer has also assessed the agricultural income of 4,452/- in the total income of the appellant and taxed tf same should have been added for rate purpose only, been done by the appellant in its computation of Income Tax Act, 1961 This action of the assessing officer has resulted into denial of rebate of 890/- allowable as per Act to the appellant. Hon'ble Commissioner (Appeals) is, therefore, humbly requested to direct the AO to take the agricultural income for rate purposes only.
6.0 Ground Nos. 2.1, 2.2 & 2.3:-
6.1 The learned assessing officer has overlooked all the documents produced before him and also the facts of the case that Mr. K. P. Singh (the appellant) and M Indira K. P. Singh were not beneficiary owners of the shares of the receiving company i.e. M/s Madhur Housing & Development Company. The shares of the said company were allotted to the firm M/s General Marketing Corporation and the same were only registered in their names simply because of the reason that shares purchased by a firm could not legally be registered in the name of the firm. The shares held by them in a fiducially capacity and all income generated there from i.e. dividend/ bonus on these shares is the income of M/s General Marketing Corporation and not their.
6.1.1 Details and documentary evidence i.e. the audited balance sheet of M/s General Marketing Corporation for the period ended Page | 16 31.03.2006 highlighting the above said holding, a copy of FORM NO- I, II & III filed under section 187 C(l) of the companies Acty 1956 i.e. (Form-I declaration filed by M Indira K.P. Singh and Mr. K.P. Singh / Form -II filed by M/s General Marketing Corporation beneficiary owner/FORM-III filed by M/s Madhur Housing and Development Co) with ROC in respect of 10200 equity share issued in the name of M Indira K.P. Singh and Mr. K.P. Singh as partners for and on behalf of M/s General Marketing Corporation were produced before the learned assessing officer, which is a matter of record. However, he chose to ignore the same.
6.1.2 Evidence of the shareholding of the payer company M/s Beverly Park Operation & Maintenance Services (P) Ltd. was also produced before him. It clearly showed that the appellant was not a shareholder of the said company. Had he given due consideration to the same, the issue could have been dosed then and there.
Unfortunately, Ld. AO persisted on claiming that the appellant was not only a shareholder of M/s Beverly Park Operation & Maintenance Services (P) Ltd. but he also had more than 10°/o of voting power thereof. For holding so, he has brought nothing on record.
6.1.3 Ld. Assessing Officer held the payment of Rs. 1,87,85,000/- made by M/s Beverly Park Operation and Maintenance (P) Ltd to Madhur Housing & Development Company (P) Ltd. as a "deemed dividend" not appreciating the true nature of the said payment.
Even if the amount paid by M/s Beveriy Park Operation and Maintenance (P) Ltd to Madhur Housing & Development Company towards subscription of debentures is held as 'dividend' as defined in section 2(22.)(e) of the Act, dividend is a not-taxable receipt as per section 10(34) of the Income Tax Act, 1961. the section are fully applicable to the assessment year under consideration. Section 2 of the Act captioned as 'Definitions' is only a defining section rather than being a charging section. So, tne addition made treating the inter-corporate transaction undertaken in the ordinary course of business as 'dividend' in the hands of appellant does not give rise to an occasion to make an addition in his case under any provision of the Act. The AO has failed to pin-point any section, which authorised her to make addition of 'dividend' in the hands of the appellant in the face of the clear-cut provisions of section 10(34), declaring the dividends as exempt from charging of any tax.
In the case of DCIT v. Haryana Financial Corporation (2012) 20 taxmann.com 312 (Chd.), it was held by the ITAT, Bench 'A', Chandigarh that " for the Assessment Year 2006-07, dividends received on shares acquired as an investment and not part of financing of industrial units, would be exempt in terms of section 10(34)."
Page | 17 In the case of DCIT v. Atu! Auto Ltd. (2013) 36 taxmann.com 90 (Rajkot- Trib) (TM) , it was held that " the assessee was entitled to exemption under section 10(34) in respect of dividends received on shares held in subsidiary company and reflected in Balance Sheet under the head 'Investments'." So, it is quite apparent that dividend income is tax free. This being so, there is no justification in taxing "deemed dividends".
6.1.4 Thus, a cumulative understanding of all the 'facts & legal submissions made above would lead to a natural conclusions that the AO has wrongly invoked the provisions of section 2(22)(e) of the I.T. Act as none of the essential conditions of section 2(22)(e) are satisfied on the facts of the assessee is as much as :-
(i) There is no loan as such and the amount has been obtained against the issue of debentures.
(ii) Mr. K.P. Singh is not beneficial owner of shares of the recipient company and all declarations
(iii) There is a direct judgment of Hon'ble Special Mumbai Bench in the case of ACIT Vs. M/s Bhaumik Colour (P) Ltd,I.T.A.No-
5030/Mum,/04 dated 19.11.08, which on identical facts have held that the provisions of section 2(22)(e) are deeming provisions which needs a strict interpretation and cannot be applied unless a person is both benefipial and a registered shareholder.
6.1.5 In support of our above submission, we rely on the following case laws:-
-274 ITR 609-in the case of Madura Coats (P) Ltd In this case it was held that " The loan proposed to be given by an Indian company to a UK company, to the extent of its accumulated profits, could not be treated as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961, as the UK company was not a direct shareholder of the Indian company, but one of its holding companies held shares in the Indian company" -275QT 270(Mumbai) in the'case of ACIT vs. Bhaumik Colour (P) Ltd.
In this case, it was held by the Hon'ble ITAT, Mumbai that:-
In the light of the above discussion, the questions referred topic special bench are answered as follow: 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 sec 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder than the provisions of sec. 2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the provision of Sec. 2(22)(e) will not apply".
Page | 18 In the case of the appellant, it is reiterated that he is not a shareholder of the lending company. So provisions of section 2(22)(e) cannot be applied to his case.
-277 ITR-128(CAL)-in the case of Mukundray K.Shah vs. CIT The matter in this case pertained to a search & seizure case for the block period 01.04.1990 to 24.08.2000. It was held by Kolkata High Court "In order to be deemed dividend within the meaning of section 2(22)(e) in any of the three categories, all the ingredients are to be satisfied, namely fa) that the company must qualify (b) that the payment must Qualify (c) that the person, to whom the payment is made, is also to qualify, and (d) then the payment is to be made out of the accumulated profits of the company. All these four ingredients in relation to the qualification of the company, the share holder, the concern and die payment by wav of loan or advance in respect of the first two categories and any kind of the payment in respect of third category out of accumulated profits, are required to be established (Para 12.3) In the facts and circumstances of the case, the company undisputedly satisfied most of the qualifications. Assuming that the assessee as such shareholder or such person having substantial interest in the firms was also qualified; assuming further that the paym&nt was made out of the accumulated profit of the companies; assuming that the payment also satisfied the qualification relating to the third category; the crucial qualification that the payment was made for the benefit of such shareholder or person or such person having substantial interest in the firm having not been satisfied the provisions of section 2(22)(e) could not be attracted to treat the same as deemed dividend."( Para 12.4) 6.1.6 Since none of the conditions has been satisfied in the instant case i. e. (appellant to hold 10°/o of the voting right (both registered and beneficiary shareholder) in the payer company herein called M/s Beverly Park Operation & Maintenance Services (P) Ltd and also to hold 20°/o beneficiary owner right (both registered and beneficiary shareholder) in the receiving company called M/s Madhur Housing & Development Company) and further that dividend income is held tax free in the Income tax Act, 1961, therefore, the addition made on account of deemed dividend u/s 2(22)(e) of the I.T.Act, 1961 in (he hand of appellant may kindly be directed to be deleted in 17 of 24 Shri Kushai Pai Singh, Smt, Indira K.P. Singh Appeal Nos. 301 & 302/2013-14 [Emphasis in the above submission is provided by me.]
5. I have carefully considered the facts of the case, submission of the appellant and perused the record. The section 2(22)(e) reads as under:
"dividend" includes-(e) any payment by a company, not being a company in which the public are substantially interested, of any Page | 19 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. But dividend does not include "
5.1 The then Finance Minister while describing the purpose of insertion of clause (e) to Section 6(A) in the 1922 Act stated.that it is being done to bring within the tax net monies paid by the closely held companies to their principal shareholder in the guise of loan and advances to avoid payment of tax. Therefore, if the said background is kept in mind, it is clear that provisions of Section 2(22)(e) of 1961 Act, which is pari materia with section 2(6A)(e) of 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholder in the form of loans or any payment by any such company on behalf, or for the individual benefit, of any such shareholder. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholder in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholder, money in the form of an advance or loan or any payment by any such company on behalf, or for the individual benefit, or any such shareholder.
5.2 From the above it is clear that provisions of section 2(22)(e) are applicable to all closely held companies only. Nomenclature of thnf section connotes that this section has been brought on statue as "Deeming Fiction". Here, shareholder for the purpose of section 2(22)(e) means being a person only equity shareholder who has substantial interest in a company in which pubiic is not substantially interested has to have substantial interest in the lending company i.e. 10% or more of voting power.
5.3 Here, in the appellant' case, it is evident that the appellant is not a share holder in the lending company, namely; M/s BPOPS. What to say of substantial interest in the lending company i.e. 10% or more of voting power in M/s BPOPS. From perusal of the tables mentioning the details of shareholding of the appellant in the reasons recorded u/s 147, it is evident that the appellant is not a share holder in M/s BPOPS. However, it is evident from the table in the reasons recorded u/s 147 that the appellant is having 32.3% of ordinary shares through 'holding companies'. Then how in such facts and circumstances the appellant was presumed to be a shareholder In M/s BPOPS at the time of recording the reasons u/s 147, when 'holding companies'; being legal entities different Page | 20 than that appellant individual, is beyond my imagination. In view- of the above, I am of the considered view that the appellant is not a share holder of M/s BPOPS. What to say of substantial interest in che lending company i.e. 10% or more of, voting power in M/s BPOPS. Thus, the decision of the Hon'ble Delhi High Court in the case of M/s MHDC; wherein it was held that the sum of Rs. 1,87,85,000/- has to be assessed as deemed dividend in the hands of the shareholder, on which basis this case was reopened, is found not followed in verbatim. Definitely, here, the deemed dividend has to be assessed in the hands of the shareholder as per the law and not otherwise.
5.3 Now the next question is that whether or not the any substantial interest in M/s MHDC. As per the man 5.4 In order to attract the provisions of Section 2(22)(e), the important consideration is that, there should be loan/advance by a company to its shareholder or any payment by any such company on behalf, or for the individual benefit, of any such shareholder. Every amount paid must makt the company a creditor of the shareholder of that amount. But at the same time, every payment by company to its shareholder may not be a loan/advance or any payment by any such company on behalf, or for the individual benefit, of any such shareholder and thereby fall within the ambit of section 2(22)(e) i.e. "Deemed Dividend."
5.5 Now the next question is that whether or not the appellant is having any substantial interest in M/s. MHDC. As per the material a available iin the record, it is evident that the appellant, in his individual capacity, is holding 3648 preference shares @ 100/- per share of M/s MHDC, Since the Preference shares are entitled to fixed rate of dividend and thus I am of the considered view that the preference shares are exonerated from rigor of the provisions of section 2(22)(e) read with section 2(32). As far as the ordinary 10200 equity shares are concerned, it is found that these shares are appearing in the audited balance sheet as on 31,03.2006 of M/s Genera! Marketing Corporation (GMC). However, these shares are held in the name of the appellant and Mrs. Indira K. P. Singh as a partnership firm cannot legally hold share in companies. The audited balance sheet as on 31.03.2006 of M/s General Marketing Corporation is on the record. This fact also gets supported by the various statutory forms u/s 187C(1) of the Companies Act, filed before the ROC, by M/s MHDC, M/s GMC, Mrs. Indira K. P. Singh and the appellant. Therefore, 10200 equity shares of M/s MHDC are not beneficially held by Mrs. Indira K. P. Singh and the appellant. Thus, the partners of M/s GMC; Mrs. Indira K. P. Singh and the appellant have no voting right in individual capacity as they owned shares in the fiduciary capacity.
5.6 The Hon'ble Delhi High. Court in the case of CIT vs. National Travel Services; 347 ITR 305, has held that for the purpose of section 2(22)(e), partnership firm is to be treated as the shareholder and it is..-not necessary that firm has to be a registered shareholder. In this case the loan was given to partnership firm and partnership firm was not the Page | 21 registered shareholder of the company, but the partners of the firm were registered shareholders and fund of the firm for that purpose has been utilized. It is a moot question as to whether the expression, "being a person as a beneficial owner of shares qualifies the word shareholder:"
i.e. whether to attract the provisions of section 2(22)(e), the person to whom the loan or advance is made should be a shareholder as well as beneficial owner. In the case of National Travel Services (supra), the Hon'ble Delhi High Court concluded that the beneficial owner may not be a registered shareholder or vice versa. The Hon'bie Delhi High Court in the case of National Travels Services (supra) elaborately analyzed this issue and concluded that in case it is accepted that firm not being a legal entity cannot become a shareholder of a company and in case loan has been advanced to a firm whose partners are shareholder then it would frustrate the provisions of section 2(22)€, and will lead to absurd results. Therefore, loan received by a firm, whose partners are registered shareholders of the company which advanced the loan, would fall within the ambit of Section 2(22)(e). The Hon'ble Delhi High Court in the case of CIT v. Bharati Overseas Trading Co.; 249 CTR 554 again affirmed that the partnership firm which has purchased the shares through its partners though not registered share holder, being beneficial owner Is to be treated as share holder and loan advanced by company to such partnership is liable to tax as deemed dividend in the hands of partnership firm. Accordingly, in light of above mentioned facts and judicial pronouncements in the cases of National Travel Services (supra) & Bharati Overseas Trading Co. (supra), I am of the considered view that neither the appellant nor Mrs. Indira K. P. Singh, in their individual capacity, has any equity shares of M/s MHDC. Thus these two, as Individuals, are not having any substantial interest in M/s MHDC.
5.7 Since the appellant has not raised any ground challenging reopening of the assessment; therefore, I am refraining myself to give any finding on the issue of reopening of the assessment even though the
-appellant's submission extracted above contains write-up on this matter.
5.8 The next issue raised by the appellant is that the deemed dividend is not taxable in view of the provisions of section 10(34). Since deemed dividend is not in the nature of dividend declared u/s 1150 as it is neither declared nor distributed/paid by the company to all the shareholders as per the law nor dividend tax has been paid thereon; therefore, it is held that the section 10(34) is not applicable here in the appellant's case.
5.9 The next question is that whether or not the sum of Rs. 1,87,85,000/- paid for debenture by M/s BPOPS to M/s MHDC is loan or advance or any payment on behalf of or for the individual benefit. Undisputedly, it is loan or advance. Now the next question is that in whose hands the deemed dividend is taxable. I have analyzed the issue of loan and advance given by the closely held company to beneficial shareholders and or to its concern vis-a-vis any payment by the closely held company on behalf of or for the individual benefit of such shareholders in depth. Here, the appellant, in capacity of individual, is neither a share holder in M/s BPOPS (lending company) nor having any Page | 22 substantial interest in M/s MHDC (borrowing company). Thus, In view of above, the deemed dividend u/s 2(22)(e) is taxable in the hands of the share holder i.e a registered or beneficial share holder and not in the hands of any other person or the concern to which the amount is given as loan or advance or paid or any payment by any such company on behalf, or for the individual benefit, of any such shareholder. Therefore, it is held that the AO has erred in taxing deemed dividend of Rs. 1,87,85.000/- in the hands of the appellant. Therefore, the same is deleted. The appellant gets consequential relief of Rs.1,87.85,000/-. Accordingly, subject to above findings, the grounds 1.1 to 2.3 are decided."
6. The Ld. CIT appeal held that that appellant is not a specified shareholder in the lending company but holding 32.3% of the ordinary shares through various holding companies. He further noted that in madhur housing development Co assessee is holding only 3648 Preference shares of Rs. 100/-. Each which are entitled to a fixed rate of dividend only. Such shares are excluded in the definition u/s 2(22) (e) of the act. With respect to the reason recorded by the assessing officer that assessee is holding 10200 equity shares of the above company he noted that the above shares as on 31/3/2006 are held by M/s Gen marketing Corporation , which is a partnership firm as partnership firm cannot hold shares in their name but in the name of their partners. He therefore held that 10200 equity shares of M/s madhur housing development Co are not beneficially held by the assessee and further assessee does do not have any voting right in her r individual capacity as she holds the shares in the fiduciary capacity. Accordingly he held that the transaction does not satisfy the basic condition of section 2 (22) (e) of the act to tax the amount of Rs. 1.87 crores of the loan given by one company to another company to be taxed in the hands of the assessee.
7. The revenue aggrieved with the order of the Ld. CIT (A) has preferred an appeal before us.
8. The Ld. departmental representative vehemently relied upon the order of the Ld. assessing officer and submitted that assessee is a beneficial shareholder of the company to whom the loans have been given and also holding substantial interest in the shares of the company who has given the loans. He submitted that even indirect shareholding also needs to be considered for deemed dividend.
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9. The Ld. authorized representative vehemently opposed the order of the Ld. CIT Appeal. The ld. Authorised representative submitted that assessee holds 10,000 shares out of total 30,003 shares having no voting rights in M/s Beverly Park maintenance services Ltd. He stated that assessee also hold 1000 shares out of total 4648 shares being 15% noncumulative preference shares of Rs. 100/- each paying the fixed rate of dividend. It was further stated that assessee holds on behalf of the partnership firm M/s General Marketing Corporation 10,200 equity shares out of the total 17502 equity shares which do not have any voting rights. He submitted that the essential conditions of section 2 (22) (e) provides that provisions are hit only if the assessee holds 10% shares with voting rights in the payer company and 20% shares with voting rights in the recipient companyof loan. In the present case both these conditions are not fulfilled therefore deemed dividend cannot be taxed in the hands of the assessee. He further referred to the provisions of section 2 (32) to state that substantial interest in the company means beneficial owner of the shares and not being shares entitled to the fixed rate of dividend and carrying not less than 20% of the voting power. He submitted that there is no voting right in the hands of the assessee on account of the shares which are held by the partnership firm in the name of the assessee in M/s Madhur housing and development Co. He further submitted that assessee does not have any voting right in Beverly Park maintenance services Ltd which is a lending company. In view of the above facts he submitted that that as the basic conditions are not fulfilled of holding at least 10% share with voting rights in payer company and holding 20% shares with voting rights in the payee company the addition is wrongly made by the Ld. assessing officer in the hands of the assessee as deemed dividend.
10. We have carefully considered the rival contentions as well as the orders of the lower authorities. According to the provisions of section 2 (22) (e) of the act any payment made by a company other than a public limited company by way of advance or loan to a shareholder , being a person who is the beneficial owner of the shares, which are not shares entitled to a fixed rate of dividend or without a right to participate in profits, Page | 24 holding not less than 10% 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 to the extent of which the company possess accumulated profits. Deemed dividend is chargeable to tax in the hands of the shareholder in case there is a loan to a shareholder or any other concern. It is also triggered in case of a company making any payment on behalf of or for the individual benefit of such shareholder. The maximum cap of such deemed dividend is the accumulated profit possessed by the company making the payment or giving the loan. Therefore according to that provision to attract provisions of section 2 (22) (e) of the act in case of a loan given to shareholder following conditions must be satisfied. i. There must be a loan or advance to a shareholder of a Company other than a company-covered u/s 18 of the act. ii. Shareholder must be the beneficial owner of the shares. iii. Such shares should not be entitled to a fixed rate of dividend. iv. The voting power of such shareholding shall not be less than 10 % of the total voting power.
In case the loan is given by the company to other concern than to tax it u/s 2 (22) (e) of the act in the hands of a shareholder following conditions must be satisfied.
i. The company should give loan to a HUF, Firm, AOP or BOI or to another company.
ii. It would be taxed in the hands of a shareholder of the lender company who :-
a. must be the beneficial owner of the shares.
b. Such shares should not be entitled to a fixed rate of dividend.
c. The voting power of such shareholding shall not be less than 10 % of the total voting power.
iii. Such shareholder should be a member, a partner, or a person having substantial interest in that concern. iv. Substantial interest in AOP, BOI, Firm or HUf means , assessee must be beneficially entitled to not less than 20 % of its income.
Page | 25 Substantial interest in case of a company is defined u/s 2(32) of the act. According to that person must be beneficial owner of shares.
v. Such shares in the borrowing company should not be entitled to a fixed rate of dividend and must carry minimum 20 % of the voting power.
11. Therefore to tax the loan from lender company to the borrowing company in the hands of the assessee following conditions must be satisfied.
a. She must be the beneficial owner of the shares of the lender company.
b. Such shares should not be entitled to a fixed rate of dividend. c. The voting power of such shareholding shall not be less than 10 % of the total voting power.
d. She must also be the beneficial shareholder of the borrowing company holding shares which are not entitled to a fixed rate of dividend and should have minimum 20 % voting right in the borrowing company.
12. In the lender company M/s Beverly Park maintenance services Ltd assessee holds shares without any voting rights. Therefore the condition of 10% of holding in the lender company fails. Secondly the assessee must hold more than 20% in M/s madhur housing and development Co. In fact the assessee holds 15% noncumulative preference shares of Rs. 10 each with a fixed rate of dividend in that company. Therefore according to that the assessee cannot be said to be holder of 20% or more in equity shares of the borrowing company. Further the shares held by assessee on behalf of the partnership firm are also without any voting right with the assessee as the assessee is not holding the same as a beneficial owner of those shares. In view of this we do not find any infirmity in the order of the Ld. CIT (A) in holding that assessee does not have the requisite shareholding in lender company and also in borrowing company to trigger the provisions of section 2 (22) (e) of the act. In view Page | 26 of this the ground No. 1, 2 and 3 of the appeal of the revenue, which are interconnected on the issue of taxability of the deemed dividend in the hands of the assessee, are dismissed.
13. In the result appeal of the revenue is dismissed.
Order pronounced in the open court on 28/05/2018.
-Sd/- -Sd/-
(AMIT SHUKLA) (PRASHANT MAHARISHI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 28/05/2018
A K Keot
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi
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