Maharishi Ayurveda Products Pvt. ... vs Department Of Income Tax

ITA NO. 4601/Del/2013

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH "E", NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI H.S. SIDHU, JUDICIAL MEMBER I.T.A. No. 4601/DEL/2013 A.Y. : 2009-10 ACIT, CIRCLE-(1), N. DELHI M/S MAHARISHI AYURVEDA ROOM NO. 413, CR BUILDING, VS. PRODUCTS PVT. LTD., I.P. ESTATE, NEW DELHI A-14, MATHURA ROAD, MOHAN CO. OP. INDL. ESTATE, NEW DELHI - 110 044 (PAN: AACCM5403A) (APPELLANT) (RESPONDENT)

Department by : Sh. K.K. JAISWAL, SR. D.R. Assessee by : Sh. S.K. GARG, ADV. & SH. AKARSH GARG, ADV.

Date of Hearing : 23-04-2015 Date of Order : 30-04-2015

ORDER

PER H.S. SIDHU : JM This appeal by the Revenue is directed against the Order of the

Ld. Commissioner of Income Tax (Appeals)-IX, New Delhi dated

20.5.2013 pertaining to assessment year 2009-10 on the following

grounds:-

"The DCIT/ACIT Circle-6(1), New Delhi is hereby directed to file

an appeal in above mentioned case before the Income Tax

Appellate Tribunal, New Delhi on the following grounds(s) of

appeal:-

1

ITA NO. 4601/Del/2013

1. Whether in the facts and circumstances of the case, the Ld.

CIT(A) erred in deleting the addition made on account of

deemed dividend u/s. 2(22)(e) of the I.T. Act, 1961 for a sum

of Rs. 1,56,81,039/- on the ground that Assessing Officer

could not prove the third limb of section ignoring the fact,

mentioned by the Assessing Officer in the assessment order,

and that benefit could be accrued direct or indirect.

2. Whether in the facts and circumstances of the case, the Ld.

CIT(A) deleted the above disallowance without providing

the Assessing Officer any opportunity to rebut, as per the

provision of Rule 46A, on the submission of the assessee

that details were filed during the course of assessment.

3. That the order of the Ld. CIT(A) is erroneous and is not

tenable on facts and in law.

4. That the grounds of appeal are without prejudice to each

other.

5. That the appellant craves leave to add, alter, amend or

forgo any ground(s) of the appeal raised above at the time

of the hearing."

2. The brief facts of the case are that the assessee company was

engaged in the business of manufacturing exporting and dealing in

all kinds of ayurvedic and herbal preparations. The return of

income for the AY 2009-10 was filed on 30.3.2010 declaring an

2 ITA NO. 4601/Del/2013

income of Rs. 3,76,95,433/-. The same was processed u/s. 143(1) of

the Act. Subsequently, the case was selected for scrutiny through

CASS and statutory notice u/s. 143(2) dated 20.8.2010 was issued

and served. The assessment was completed u/s. 143(3) vide order

dated 29.12.2011 by the AO at the income of Rs. 5,33,76,472/-

making the various additions.

3. Against the assessment order, assesse appeal before the Ld. CIT(A), who vide impugned order dated 20.5.2013 has partly allowed the appeal of the assessee.

4. Aggrieved with the aforesaid impugned order, Revenue is in appeal before the Tribunal.

5. Ld. DR relied upon the order of the Assessing Officer and

reiterated the contentions raised by the Revenue in the grounds of

appeal.

6. On the contrary, Ld. Counsel of the assessee relied upon the

order of the Ld. CIT(A) and submitted that the impugned order of the

Ld. CIT(A) may be upheld.

7. We have heard both the parties and perused the orders passed

by the Revenue Authorities alongwith documentary evidence filed

by the assessee in the shape of Paper Book. The only issue involved

in the present Appeal is the addition of Rs. 1,56,81,039/- made by

the AO u/s 2(22)(e) of the I.T. Act, 1961. The AO has made the

addition in dispute as more than 90% is beneficial and registered

3 ITA NO. 4601/Del/2013

share holding in the companies to whom loan has been given by the

assessee company is with the family members of Shri Anand

Prakash Srivastava and AO has held that the loan or advance was

made are liable to be treated as benefit accruing in the case of the

assessee who is substantial share holder of the assessee company

and thus provisions of section 2(22)(e) is attracted in the case of the

assessee. The Ld. CIT(A) has decided the issue in dispute in the

appeal filed by the Assessee in his impugned order. For the sake of

convenience, the relevant portion of the Ld. CIT(A)'s order from

paras 3 to 13 at pages 2 to 11 is reproduced below:-

"3.1 The appellant company was engaged in the

business of manufacturing exporting and dealing in all

kinds of ayurvedic and herbal preparations.

3.2 The return of income for the AY 2009-10 was filed

on 30.3.2010 declaring an income of Rs. 37695433/-.

The same was processed u/s. 143(1) of the Act.

Subsequently, the case was selected for scrutiny through

CASS and statutory notice u/s. 143(2) dated 20.8.2010

was issued and served. The assessment was completed

u/s. 143(2) vide order dated 29.12.2011 by the AO at the

income of Rs. 53376472/- making the following additions:

4

ITA NO. 4601/Del/2013

3.3. Aggrieved with the above, the appellant filed the

present appeal. On behalf of the appellant, Sh. Deepak

Jain, CA appeared and made written and oral

submissions. The only issue involved is the addition

under section 2(22)(e) for the sums aggregating Rs.

1,56,81,039/- paid as loan/advance by the appellant

company to as many as 4 person (3 companies and 1

charitable society).

S.No. Company's Opening Paid Received Closing Nature name balance during during the balance of the year year payment made 1. Global 55633463 6946039 12675000 49904502 Loan Diamonds (P) Ltd. 2. Maharishi 868847 2350000 - 3218847 Advance Vedic Construction Corpn. (P) Ltd. 3. Golden 40626000 385000 - 41011000 Advance Glades Ltd. 4. SRM - 6000000 - 6000000 Loan Foundation of India (Charitable) Total (Rs.) 97128310 15681039 12675000 100134349

4. The AO has made the said addition as more than 90%

beneficial and registered share holding in the companies to

whom loan has been given by the assessee company is with

the family members of Shri Anand Prakash Srivastava,

therefore, the AO held that the loan or advance so made, are

5 ITA NO. 4601/Del/2013

liable to be treated as a benefit accruing to Sh. Anand Prakash

Srivastava who is substantial share holder of the appellant

company and thus provisions of section 2(22)(e) are attracted

in the present case.

5. The provision of section 2(22)(e) reads as under:-

"2(22)"dividend includes

(a) to (d)............

(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) by way of advance or loan to a shareholder,

being a person who has a substantial interest in the company,

by the Finance Act, 1987, w.e.f. 1.4.1988 (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

6 ITA NO. 4601/Del/2013

the extent to which the company in either case possesses

accumulated profits;

5.1 The three limbs of section 2(22(e) are as follows:

"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 May 31, 1987, by

way of advance or loan.

First limb:-

(a) 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,

Second limb:-

(b) 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).

Third limb:-

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ITA NO. 4601/Del/2013

(c) 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;

5.2 The provisions of section 2(22)(e) create a fiction bringing

in amount paid otherwise than as dividend, into the net of

dividends. Therefore, this clause must be given a strict

interpretation as has been held by the Hon'ble Supreme Court

in the case of CIT v. C. P. Sarathy Mudaliar [1972] 83 ITR

170(SC) Rameshwarlal Sanwarmal v. CIT [1980] 122 ITR 1 (SC)

6. It is seen that Shri Anand Prakash Srivastava is the

beneficial owner and registered share holder, holding 99.9% of

voting power of the assessee company; he is the substantial

shareholder of the assessee company.

6.1 It now has to be seen whether

• loans and advances have been given to him as per clause (a),

⦁ or to any concern in which Shri. Anand Prakash Srivastava is a

member or a partner and in which he has a substantial interest as

per clause (b),

⦁ any person on behalf of or for the individual benefit of Shri.

Anand Prakash Srivastava (c)

8 ITA NO. 4601/Del/2013

6.2 Loans or advance have not been made by the appellant

company to Shri Anand Prakash Shrivastava therefore, condition

No. (a) is not attracted in the present case.

6.3 The shareholding pattern of three companies to whom loans

and advances have been given, on account of which addition

under section 2(22)(e) has been made is as under:

A. Global Diamonds Pvt. Ltd.

_________________________________________________________________

SI. Name of the No. of equity Paid-up. % age of No. Shareholder share of Rs.10 share capital holding each

--------------------------------------------------------------------------------------------

(i) Anand Prakash 3,93,300 39,33,000 19.66% Shrivastava (ii J.P. Shrivastava 3,21,250 32,12,500 16.06%

(iii Ram Shrivastava 2,89,130 28,91,300 14.46%

(iv) Nishi Srivastava 1,44,665 14,46,650 7.23%

(v) Aditi Srivastava 1,44,565 14,45,650 7.23%

(vi Amrita Srivastava 1,44,565 14,45,650 7.23%

(vii Richa Srivastava 1,44,565 14,45,650 7.23%

(viii) Ajay Srivastava 1,44,565 14,45,650 7.23%

(ix Sanjay Srivastava 1,28,500 12,85,000 6.43%

9 ITA NO. 4601/Del/2013

Others 1,44,895 14,48,950 7.24%

Total 20,00,000 2,00,00,000 100.00%

B. Maharishi Vedic Construction Corporation (P) Ltd.

SI. Name of the No. of equity Paid-up % age of No. Shareholder share of Rs.10 share holding each capital

--------------------------------------------------------------------------------------

(i) Maharishi Global 2,95,99,358 29,59,93,580 99.994% Construction Ltd. *

(ii) Anand Prakash 1,000 10,000 00.003% Shrivastava

(iii) Others 1,070 10,700 00.003% Total 2,96,01,428 29,60,14,280 100.000% * Note : Shri Anand Prakash Shrivastava does not hold any equity shares in Maharishi Global Construction ltd.

C. Golden - Global Glades Ltd

SI. Name of the No. of equity Paid-up % age of No. Shareholder share of Rs.10 share holding each capital

--------------------------------------------------------------------------------------

(i) Anand Prakash 19,746 1,97,460 4.562% Shrivastava

(ii) Hima Srivastava 42,900 4,29,000 9.911 %

(iii)Ram Srivastava 42,900 4,29,000 9.911%

(iv)Nishi Srivastava 49,500 4,95,000 11.436%

(v) Richa Srivastava 42,900 4,29,000 9.911%

(vi) Pragya Srivastava 42,900 4,29,000 9.911 %

10 ITA NO. 4601/Del/2013

(vii)Others 1,92,014 19,20,140 44.358%

Total 4,32,860 43,28,600 100.000%

Further, as regards SRM Foundation of India, it is a charitable

society duly registered under the Societies Registration Act and

also with the Director of Income-tax (Exemption) under section

12A of the Act, wherein family members of Shri. Anand Prakash

Srivastava are office bearers/members of the society.

6.4 For condition no. (b) "substantial interest" has to be

understood. It has been defined in section 2(32) of the Act, to

mean a person beneficially owning at least 20% of its voting

power. Section 2(32) reads as under:

"2(32) "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;"

6.5 When the aforesaid situation is applied to the facts of the

present case, it is evident that Shri. Anand Prakash Srivastava

(who holds 99.9% shares in the appellant company) holds

following shareholding / voting power in the three companies and

11 ITA NO. 4601/Del/2013

one society in relation to which section 2(22)(e) has been

invoked:

SI. Name of the company/concern % of Voting Rights/ No. lncome

(i) Global Diamonds (P) Ltd 19.66%

(ii) Maharishi Vedic Construction 0.003%

Corpn. (P) Ltd.

(iii) Golden Glades Ltd. 4.562%

(iv) SRM Foundation of India Nil, being charitable society

6.6 It is here that the controversy has arisen. The Assessing

Officer is of the opinion that so as to hold whether a person has a

substantial interest in a company or not, the holding of all the

family members including of Shri Anand Prakash Srivastava is to

be seen and clubbed together; and as such shareholding exceeds

20% in all the companies or concerns, therefore, provisions of

section 2(22)(e) gets attracted. The percentage of shareholding 1

voting power/ share in the income after clubbing of the share of

the family members in the four companies / concern is as under:

SI. No. Name of the company / concern % of share holding / voting rights / income

(i) Global Diamonds (P) Ltd Above 20% 12 ITA NO. 4601/Del/2013

(ii) Maharishi Vedic Construction Corpn. (P) Ltd. only .003%

(iii) Golden Glades Ltd. Above 20%

(iv) SRM Foundation of India Nil, being charitable society

7. The appellant in this regard has contended before me. Further,

as regards the inclusion/clubbing of shareholding of family

members, that there is nothing in section 2(22)(e) of the Act or

section 2(32) of the Act so as to suggest that the holding or

ownership of voting rights of the shares held by the family can be

taken into consideration for the purposes of determining

substantial shareholding of a person/shareholder. The words used

are "such shareholder is a member or a partner and in which he

has a substantial interest" as appearing in section 2(22)(e) of the

Act and "a person who is the beneficial owner of the 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 20%

of the voting power" as appearing in section 2(32) of the Act.

Thus it is the ownership of the shareholder alone in the company

to which the loan/ advance is made by the company, and not his

or her relative or family members, which is the determinative

factor. Accordingly, inclusion / clubbing of beneficial ownership of

family members with that of Shri. Anand Prakash Srivastava is not

13 ITA NO. 4601/Del/2013

mandated by the provisions of the Act and thus tantamount to

reading a condition which is not there.

It is a trite law that provisions of section 2(22)(e) have to be

construed strictly whereas inclusion / clubbing of shareholding of

family members will tantamount to creating fiction over fiction.

Further, that income tax is a personal tax and is levied on a

person in respect of his total income i. e. the income which has

arisen, accrued or received or deemed to have arisen accrued or

received by him and the income is being computed as per

provisions of the Act. Wife, son, daughter and other family

members of an assessee are different assessees, independent

and distinct persons and entities under the Act and unless the

lw prescribes the transactions made by them to be clubbed

together while computing the income of the assessee, no

cognizance of the shareholding or other transactions thereof

could be taken into consideration while computing the income of

the assessee. Therefore, the provisions of said section 2(22)(e)

are not applicable to the facts of the present case.

It is submitted that the loans loans/advances given by the

appellant company cannot be termed as having been made for

and on behalf of or for the individual benefit of Shri. Anand

14 ITA NO. 4601/Del/2013

Prakash Srivastava as envisaged by the provisions of section

2(22)(e)

On a perusal of assessment order the AO has nowhere

demonstrated or established any nexus between the loans

granted by the appellant company vis-à-vis flow of funds to Sh.

Anand Prakash Srivastava (shareholder of the appellant

company). Therefore, the finding of the Ld. AO in this regard is

merely based on assumption and presumption only and

deserves to be quashed being based on no evidence

.....

Whereas in the present case, there is no finding that loan /

advances given by the appellant company to the three companies

and one charitable society have reached the hands of APS (a

shareholder controlling the appellant company)

.....

8. The Special Bench of the Hon'ble ITAT in the case of Assistant

Commissioner of Income Tax vs. Bhaumik Colour P. Ltd [2009]

313 ITR (A.T.) 0146 (Mum) (SB) has taken a very strict

interpretation of Section 2(22)(e) and has stated as under :-

"Section 2(22) of the Act artificially extends the scope of

dividend from being more than only a distribution of

15 ITA NO. 4601/Del/2013

profits to cover certain other types disbursements such

as loans paid, etc.

........

The new category of payment which was considered as

dividend introduced by the Finance Act, 1987, with effect

from April 1, 1988, by the second limb of section 2(22)(e)

is payment" to any concern in which such shareholder is

a member or a partner and in which he has a substantial

interest". It is this category of payment with which we are

concerned in this reference. The following conditions are

required to be satisfied for application of the above

category of payment to be regarded as dividend. They

are:

" (a) There must be a payment to a concern by a company.

(b) A person must be a shareholder of the company being a

registered holder and 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. This is

because of the expression 'such shareholder' found in the

relevant provision. This expression only refers to the

shareholder referred to in the earlier part of section

16 ITA NO. 4601/Del/2013

2(22)(e), viz., a registered and a beneficial holder of

shares holding 10% voting power

(c) The very same person referred to in (b) above must

also be a member or a partner in the concern holding

substantial interest in the concern, viz., when the concern

is not a company, he must at any time during the

previous year, be beneficially entitled to not less than

twenty per cent. of the income of such concern; and

where the concern is a company he must be the 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.

(d) If the above conditions are satisfied then the payment by

the company to the concern will be dividend.

The intention behind enacting the provisions of section

2(22)(e) is 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 become tax-able in the hands of the

17 ITA NO. 4601/Del/2013

shareholders. Instead of distributing accumulated profits as

dividend, companies distribute them as loan or advances to

shareholder 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 its 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 Apex Court while considering what can come within the artificial definition of dividend under section 2(22) in the case of CIT v. Nalin Behari Lall Singha [1969] 74 ITR 849 (SC) described the scope of the definition of dividend thus

"The definition is, it is true, an inclusive definition and a

receipt by a shareholder which does not fall within the

definition may possibly be regarded as dividend within

18 ITA NO. 4601/Del/2013

the meaning of the Act unless the context negatives that

view."

8.1 In this case the ratio laid down, in brief, was that the

deemed dividend can be assessed only in hands of a person

who is a shareholder of lender company and not in hands of a

person other than a shareholder . Also expression 'shareholder'

referred to in section 2(22)(e) refers to both a registered

shareholder and beneficial shareholder and, thus, if a person is

a registered shareholder but not beneficial shareholder then

provisions of section 2(22)(e) do not apply and similarly if a

person is a beneficial shareholder but not a registered

shareholder then also provisions of section 2(22)(e) do not

apply. The Tribunal thus took a very strict interpretation and

went completely by the letter of the provision. As this Section

creates a fiction bringing in amounts paid otherwise than as

dividends, into the net of dividends, it does not allow for any

further interpretation or leeway for creating any further fiction.

9. In Smt. Gunvanti R. Mehta [1993] 45 ITD 382 (BOM)

wherein the Tribunal commented on the issue the shares held

by the family can be taken into consideration in determining

the "substantial interest in the company" held as under:-

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ITA NO. 4601/Del/2013

"I find that there is nothing in section 2(22)(e) of the Act

or section 2(32) of the Act to suggest that the holding or

ownership of voting rights of the shares held by the

family can be taken into consideration for determining

the question as to whether a person is substantially

interested in the company or not. The words are

"shareholder, being a person who has a substantial

interest in the company" as appearing in section 2 (22)(e)

of the Act and "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" as appearing in section 2(32) of the Act. It

is the ownership of the shareholder alone, to whom the

loan/advance is made by the company, and not his or her

relative or family member which is the determinative

factor. Income-tax is a personal tax and is levied on a

person in respect of his total income, i.e., the income

which has arisen, accrued or received or deemed to have

arisen, accrued or received by him and the amount is the

computation as per the provisions of the Act Husband

and son of the assessee are different assessee,

independent and distinct persons and entitles under the

20 ITA NO. 4601/Del/2013

Act and unless the law prescribes the transactions to be

looked into together while computing the income of the

assessee, no cognizance of the shareholdings or other

transactions thereof could be taken into consideration

while computing the income of the assessee. No

provision has been brought to my notice which authorises

the revenue authorities to consider the share holding or

ownership of the husband or son as the holding or

ownership of the assessee or to include the same for

determining the assessee's interest in the company."

10. Following this case, the aforementioned case has

correctly brought out that the other relatives of Sh. Anand

Prakash Shrivastava are different, distinct and independent

assessee under the Act and unless the law prescribes that the

transactions / holdings of these persons can be clubbed with

that of the majority shareholder, it cannot be done.

Accordingly, it is held that in the case at hand that the

aforesaid condition No. (b) given in para 5.2 above is not

attracted.

11. The AO has not brought out any facts to show that the

third limb (c) given in para 5.2 of Section is attracted. Loans /

advances given by the appellant company cannot be termed

21 ITA NO. 4601/Del/2013

as having been made for an on behalf of or for the individual

benefit of Sh. Anand Prakash Srivastava as envisaged by the

provisions of section 2(22)(e) unless some transactions to

prove this are brought out. The individual benefit of Sh. Anand

Prakash Srivastava can said to arise only when such sums

have gone to meet the liabilities or make assets for of Sh.

Anand Prakash Srivastava. Such nexus between the loans

granted by the appellant company to Shri Anand Prakash

Srivastava has not been demonstrated or established. Merely

his family members being shareholders in these companies

does not held establish the nexus or benefit.

12. (wrongly mentioned as 13)

Grounds of appeal no. 2, 3 & 4 are allowed. The addition of Rs.

1,56,81,039/- on account of deem dividend u/s. 2(22)(e) is

deleted."

7.1 After going through the impugned order passed by the Ld.

CIT(A), we are of the view that the AO is of the view that that

whether a person has a substantial interest in the company or not,

the holding of the family members including the APS is to be seen

and clubbed together and as such the share holding receipts of 20%

in all the companies or concerns, the provisions of section 2(22)(e)

of the I.T. Act gets attracted. In the impugned order the Ld. First

22 ITA NO. 4601/Del/2013

Appellate Authority held that there is nothing in section 2(22)(e) of

the Act or section 2(32) of the Act so as to suggest that the holding

or ownership of voting rights of the shares held by the family can be

taken into consideration for the purposes of determining substantial

shareholding of a person/shareholder. The words used are "such

shareholder is a member or a partner and in which he has a

substantial interest" as appearing in section 2(22)(e) of the Act and

"a person who is the beneficial owner of the 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 20% of the

voting power" as appearing in section 2(32) of the Act. Thus it is the

ownership of the shareholder alone in the company to which the

loan/ advance is made by the company, and not his or her relative

or family members, which is the determinative factor. Accordingly,

inclusion / clubbing of beneficial ownership of family members with

that of Shri Anand Prakash Srivastava is not mandated by the

provisions of the Act and thus tantamount to reading a condition

which is not there.

7.2 We find that Ld. CIT(A) has also held that the loan / advance

given by the assessee company cannot be termed as having been

made for and on behalf or for the individual benefit of APS, as

envisaged by the provisions of section 2(22)(e) of the I.T. Act.

23

ITA NO. 4601/Del/2013

7.3 We find that the Ld. CIT(A) has rightly referred the Special

Bench of the ITAT in the case of Assistant Commissioner of Income-

tax v. Bhaumik Colour P. Ltd [2009] 313 ITR (A.T.) 0146 (Mum) (SB)

has taken a very strict interpretation of Section 2(22)(e) and has

stated as under :-

"Section 2(22) of the Act artificially extends the scope of

dividend from being more than only a distribution of

profits to cover certain other types disbursements such

as loans paid, etc.

........

The new category of payment which was considered as

dividend introduced by the Finance Act, 1987, with effect

from April 1, 1988, by the second limb of section 2(22)(e)

is payment" to any concern in which such shareholder is

a member or a partner and in which he has a substantial

interest". It is this category of payment with which we are

concerned in this reference. The following conditions are

required to be satisfied for application of the above

category of payment to be regarded as dividend. They

are:

" (a) There must be a payment to a concern by a company.

24

ITA NO. 4601/Del/2013

(c) A person must be a shareholder of the company being a

registered holder and 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. This is

because of the expression 'such shareholder' found in the

relevant provision. This expression only refers to the

shareholder referred to in the earlier part of section

2(22)(e), viz., a registered and a beneficial holder of

shares holding 10% voting power

(c) The very same person referred to in (b) above must

also be a member or a partner in the concern holding

substantial interest in the concern, viz., when the concern

is not a company, he must at any time during the

previous year, be beneficially entitled to not less than

twenty per cent. of the income of such concern; and

where the concern is a company he must be the 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.

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(d) If the above conditions are satisfied then the payment by

the company to the concern will be dividend.

7.4 We find that the intention behind enacting the provisions of

section 2(22)(e) is 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 become tax-able in the hands

of the shareholders. Instead of distributing accumulated profits as

dividend, companies distribute them as loan or advances to

shareholder 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 its 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.

.......

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7.5 We note that the Hon'ble Apex Court while considering what can come within the artificial definition of dividend under section 2(22) in the case of CIT v. Nalin Behari Lall Singha [1969] 74 ITR 849 (SC) described the scope of the definition of dividend thus

"The definition is, it is true, an inclusive definition and a

receipt by a shareholder which does not fall within the

definition may possibly be regarded as dividend within

the meaning of the Act unless the context negatives that

view."

7.6 We also find that the Ld. CIT(A) has relied upon the ITAT case

in Smt. Gunvanti R. Mehta [1993] 45 ITD 382 (BOM) wherein the

Tribunal commented on the issue the shares held by the family can

be taken into consideration in determining the "substantial interest

in the company" held as under:-

"I find that there is nothing in section 2(22)(e) of the Act or section 2(32) of the Act to suggest that the holding or ownership of voting rights of the shares held by the family can be taken into consideration for determining the question as to whether a person is substantially interested in the company or not. The words are "shareholder, being a person who has a substantial interest in the company" as appearing in section 2 (22)(e) of the Act and "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

27 ITA NO. 4601/Del/2013

voting power" as appearing in section 2(32) of the Act. It is the ownership of the shareholder alone, to whom the loan/advance is made by the company, and not his or her relative or family member which is the determinative factor. Income-tax is a personal tax and is levied on a person in respect of his total income, i.e., the income which has arisen, accrued or received or deemed to have arisen, accrued or received by him and the amount is the computation as per the provisions of the Act Husband and son of the assessee are different assessee, independent and distinct persons and entitles under the Act and unless the law prescribes the transactions to be looked into together while computing the income of the assessee, no cognizance of the shareholdings or other transactions thereof could be taken into consideration while computing the income of the assessee. No provision has been brought to my notice which authorises the revenue authorities to consider the share holding or ownership of the husband or son as the holding or ownership of the assessee or to include the same for determining the assessee's interest in the company."

8. With regard to ground no 2 is concerned relating to deletion of disallowance without providing the AO any opportunity to rebut, as per the provision of Rule 46A, on the submission of the assessee that details were filed during the course of assessment. In our view, the Ld. CIT(A) has not admitted any additional evidence, on the addition in dispute, hence, the contention raised by the Revenue regarding without providing the AO an opportunity to rebut, as per the provisions of Rule 46A, has no force, therefore, the ground no. 2 raised by the Revenue is hereby dismissed."

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9. Keeping in view of the facts and circumstances of case, as explained above, we are of the considered view that Ld. First Appellate Authority has deleted the addition in dispute by respectfully following the judgment of the Hon'ble Supreme Court in the case of Nalin Behari Lall Singha [1969] 74 ITR 849 (SC) (Supra) and decision of the ITAT, Mumbai, Special Bench in the case of Assistant Commissioner of Income-tax v. Bhaumik Colour P. Ltd [2009] 313 ITR (A.T.) 0146 (Mum) (SB) (Supra), which does need any interference on our part, hence, we uphold the impugned order by dismissing the Appeal filed by the Revenue.

10. In the result, the Appeal filed by the Revenue stands dismissed.

Order pronounced in the Open Court on 30/4/2015.

Sd/- Sd/- [S.V. MEHROTRA] [H.S. SIDHU] ACCOUNTANT MEMBER JUDICIAL MEMBER Date 30/4/2015 "SRBHATNAGAR" Copy forwarded to: - 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY By Order,

Assistant Registrar, ITAT, Delhi Benches

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