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Section 2(22)(e) in The Income- Tax Act, 1995
Section 2(22) in The Income- Tax Act, 1995
The Income- Tax Act, 1995

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Income Tax Appellate Tribunal - Mumbai
Packam Controls P.Ltd (Formerly ... vs Department Of Income Tax on 13 March, 2012

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCHES "C", MUMBAI

Before Shri Rajendra Singh, AM and Shri V.Durga Rao, JM ITA No.3897/Mum/2011 : Asst. Year 2008-2009

The Dy.Commissioner of Income-tax M/s.Packam Controls Private Limited Circle 9(2) (Formerly known as Patel Aluminium Mumbai. Private Limited) Vs.

Patel Vanika

Western Express Highway

Goregaon (East), Mumbai-400 063.

PAN : AAACP2738F.

(Appellant) (Respondent)

Appellant by : Shri T.C.Subramanian

Respondent by : Shri S.K.Somani

Date of Hearing : 13.03.2012 Date of Pronouncement :13.03.2012

ORDER

Per V.Durga Rao, JM :

This appeal by the Revenue arises out of the order passed by the Commissioner of Income-tax (Appeals)-XX on 04.03.2011 relates to the assessment year 2008-2009.

2. The ground raised by the Revenue reads as under:-

"On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of `69,00,723/- which represents deemed dividend taxable u/s.2(22)(e) of the I.T.Act, 1961, disregarding the fact that the issue contested in appeal is yet to be resolved finally and based on the facts of the instant case, the amount received by the assessee from M/s.Extrusion Process Pvt. Ltd. was clearly hit by the provisions of section 2(22)(e) read with explanation 3 thereof."

3. The facts are in brief that the assessee is engaged in the business of manufacturing of cam indexers, dies and tools. The assessee has filed its return of income declaring loss of `98,53,089. During the course of assessment 2 ITA No.3897/Mum/2011

M/s.Packam Controls Private Limited.

proceedings, the Assessing Officer observed that during the year under consideration there was a credit balance of M/s.Extrusion Process Private Limited amounting to `69,00,723 in the books of the assessee. The assessee was asked to explain as to why the amount given by M/s.Extrusion Process Private Limited should not be treated as deemed dividend u/s 2(22)(e) of the Income-tax Act. The assessee vide letter dated 25.10.2010 has explained to the A.O. that the assessee is selling the goods to M/s.Extrusion Process Private Limited and the amount lying to the credit of the part represents advance received from them against order for sale and it is a trade advance which does not fall within the provisions of section 2(22)(e) of the Act. However, the A.O. did not accept the submissions made by the A.O. by stating that in M/s.Extrusion Process Private Limited, Shri M.I.Patel, Director of the assessee- company holds more than 20% of the shares of the assessee-company. The A.O. further noticed that the balance sheet of M/s.Extrusion Process Private Limited reveals that the reserves and surplus in this company was `3,32,10,371 which was more than the amount outstanding to the credit of this company in the books of the assessee. He, therefore, made addition of the said credit balance of `69,00,723 u/s.2(22)(e) of the Act. Aggrieved, the assessee carried the matter in appeal before the learned CIT(A). The learned CIT(A) deleted the addition by observing in para 4 to 4.3 of his order, as under:-

"4. I have considered the dispute. It is necessary to extract below the relevant provisions under section 2(22).

(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 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 3 ITA No.3897/Mum/2011

M/s.Packam Controls Private Limited.

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--

............

(ii) any advance or loan made to a shareholder 25or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ;

.............

Explanation 1.-- The expression "accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956 ;

Explanation 2.-- The expression "accumulated profits", in sub- clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub- clauses, .......

Explanation 3.-- For the purposes 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 per cent. of the income of such concern ;...."

4.2 It is not the case of the AO that the appellant is beneficial owner of more than 10% of the shareholdings of the lending company. A plain reading of section 2(22)(e) shows that in the circumstances stated therein any payment by a company to a shareholder either directly or on his behalf to a concern in which he has substantial interest would to the extent of its accumulated profit would amount to dividend in the hands of such shareholder. Besides, any payment by such company to any one for the 4 ITA No.3897/Mum/2011

M/s.Packam Controls Private Limited.

individual benefit of such shareholder would also amount to dividend to the extent of its accumulated profit in the hands of such shareholder. However, in the latter case not only the payment has to be shown but also the benefit to the shareholder also to be established. It is thus clear that deemed dividend can be assessed only in the hands of a person who is a beneficial shareholder of the lender company.As observed above, admittedly, the appellant is not a shareholder of the lending concern. In ACIT vs. Bhaumik Colour (P) Limited 313 ITR (AT) 146 (SB) (Mum), Hon'ble Tribunal held that deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. It further held that the expression `shareholder' referred to in section 2(22)(e) refers to both registered shareholder and beneficial shareholder and, therefore, if a person is a registered shareholder but not the beneficial shareholder then the provisions of s.2(22)(e) will not apply, similarly, if a person is a beneficial shareholder but not a registered shareholder then also the provisions of s.2(22)(e) will not apply.

4.3 In the case of Universal Medicare P Ltd. (supra) the Tribunal had following the decision of the Special Bench in Bhaumik Colour (supra) held that money advanced for the benefit of a shareholder has to be taxed only in the hands of such shareholder as deemed dividend. Upholding the order of the Tribunal, Hon'ble Bombay High Court after analyzing the provisions held that section 2(22)(e) defines the ambit of the expression `dividend' and all payments by way of dividend have to be taxed in the hands of the recipient of dividend namely the shareholder and not in the hands of any other concern receiving such payment. I, therefore, hold that in the circumstances of the case, the provisions of section 2(22)(e) do not apply to the appellant. I delete the addition made of `69,00,723."

4. Aggrieved by the action of the learned CIT(A), the Revenue has carried the matter in appeal before us.

5. At the time of hearing before us, the learned Counsel for the assessee submitted that the issue involved in this appeal with regard to deemed dividend u/s 2(22)(e) is squarely covered in favour of the assessee in its own case by the order of the Tribunal in ITA No.1598/Mum/2010 for assessment year 2006- 5 ITA No.3897/Mum/2011

M/s.Packam Controls Private Limited.

2007, copy of which is placed on record, and also the decision of the Hon'ble Bombay High Court in the case of CIT v. Universal Medicare Private Limited [324 ITR 263]. The learned Departmental Representative fairly accepted that this issue is covered by the decision of the Hon'ble Bombay High Court in the case of Universal Medicare Private Limited (supra) and also assessee's own case.

6. We have heard both the parties and perused the relevant material on record. The issue involved in this appeal whether section 2(22)(e) applies to the assessee or not. The learned CIT(A) gave a specific finding that section 2(22)(e) has no application in this case. Therefore, we do not find any infirmity in the order passed by the learned CIT(A) and apart from that the view taken by the learned CIT(A) is supported by the order of the Tribunal in assessee's own case in ITA No.1598/Mum/2010 dated 19th January, 2011 and also the decision of the Hon'ble jurisdictional High Court in the case of Universal Medicare Private Limited (supra). Accordingly, we uphold the order of the learned CIT(A).

7. In the result, the appeal is dismissed.

Order pronounced in the open Court on this 13th day of March, 2012.

Sd/- Sd/- (Rajendra Singh) (V.Durga Rao) ACCOU NTANT MEMBER JUDICIAL MEMBER

Mumbai : 13th March, 2012.

Devdas*

Copy to :

1. The Appellant.

2. The Respondent.

3. The CIT concerned

4. The CIT(A) - XX, Mumbai

5. The DR/ITAT, Mumbai.

6. Guard File.

6 ITA No.3897/Mum/2011

M/s.Packam Controls Private Limited.

TRUE COPY.

By Order

Assistant Registrar, ITAT, Mumbai.