IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 364/Hyd/2013
Assessment Year : 2009-10
Dy. Commissioner of Income-tax, ... Appellant
Circle - 16(2,)Hyderabad.
Vs.
M/s Margadarshi Marketing (P) Ltd., ... Respondent
Hyderabad
(PAN AAACA2210N)
Appellant by : Shri D. Sudhakar Rao
Respondent by : Shri K. Gopal Chowdhary
Date of Hearing : 08/10/2013
Date of Pronouncement : 08/10/2013
ORDER
PER SAKTIJIT DEY, J.M.:
This appeal preferred by the Revenue is directed against
the order of CIT(A)-V, Hyderabad, for the assessment year 2009-
10.
2. In the grounds raised the Department has
challenged the order of the CIT(A) deleting the addition
made by the Assessing Officer by treating the amount
received as deemed dividend u/s 2(22)(e) of the Act.
2 ITA No. 364/H/11
M/s Margdarshi Marketing (P) Ltd.
3. Briefly the facts are, the assessee is a Private Ltd.
company mainly engaged in the business of marketing
and sale promotion besides various other activities. For
the assessment year under dispute the assessee filed its
return of income on 30/09/2009 admitting a loss of Rs.
1,48,13,495/-. The return was processed u/s 143(1) of
the Act. During the course of assessment proceeding the
Assessing Officer noticed that the assessee was providing
services to M/s Ushodaya Enterprises Ltd. For rendering
services the assessee was receiving advances from
Ushodaya Enterprises and the advances are subsequently
adjusted against the bills raised for the services
rendered. The Assessing Officer further noticed that Ch.
Ramoji Rao (HUF) is holding 90% share or voting right in
both the companies. Ushodaya Enterprises Ltd is also
having accumulated profits. The Assessing Officer
therefore was of the view that the excess advances
received against the services to be rendered comes
under the purview of deemed dividend u/s 2(22)(e) of
the Act. Though it was submitted by the assessee that
the advances are not in the nature of loans but were
trade credits against which bills were raised and services
were rendered, the Assessing Officer however rejecting
such contention held that advances received fell within
the purview of deemed dividend u/s 2(22)(e) of the Act
and accordingly treated the amount of Rs. 3,32,25,964/-
as income of the assessee for the assessment year under
dispute.
4. The assessee challenged the assessment order so
passed by preferring an appeal before the CIT(A). The
CIT(A) following his finding in assessee's appeal for the
3 ITA No. 364/H/11
M/s Margdarshi Marketing (P) Ltd.
assessment year 2006-07 held that addition made by the
Assessing Officer in terms of deemed dividend could not
be made in the hands of the assessee as the assessee is
not a shareholder of M/s Ushodaya Enterprises Ltd. He
further held that the advances made by Ushodaya
Enterprises Ltd are in the form of a running account of
commercial trade, hence do not come within the purview
of deemed dividend as per section 2(22)(e) of the Act.
The CIT(A) accordingly deleted the addition made by the
Assessing Officer.
5. Being aggrieved of the aforesaid assessment order
of the CIT(A), the Revenue is in appeal before us.
6. Before us, the learned counsel for the assessee has
canvassed that the issue in dispute is squarely covered in
favour of the assessee by the decision of the coordinate
bench of ITAT, Hyderabad in assessee's own case for AY
2005-06, 2006-07, 2007-08 and 2008-09 in ITA Nos.
689, 690 & 1234/Hyd/2010 and 1849/Hyd/2011 wherein
the coordinate bench upheld the orders of the CIT(A)
dismissing the appeals filed by the Revenue.
7. The learned DR, on the other hand, has not
controverted the submissions of the learned counsel nor
brought any contrary decision in this regard.
8. After considering the rival submissions and perusing
the record, we find that similar issue came up for
consideration before the coordinate bench in assessee's
own case for AYs 2005-06 to 2008-09 (supra), wherein
the Bench held as follows:
4 ITA No. 364/H/11
M/s Margdarshi Marketing (P) Ltd.
"7. Having heard the submissions of the parties and
perused the orders of the revenue authorities as well
as other materials on record, we do not find any
infirmity in the order of the CIT(A). The fact that the
assessee is not a shareholder of M/s Ushodaya
Enterprises Ltd. has not been controverted by the
department. Therefore, as per the provision
contained u/s 2(22)(e) of the Act the advances
cannot be considered as deemed dividend in the
hands of the assessee. The Hon'ble Delhi High Court
in case of CIT Vs. Ankitech P. Ltd. 340 ITR 14,
while considering identical issue approved the
decision of the ITAT, Mumbai Special Bench in case
of Bhaumic Colours (P) Ltd., 313 ITR (AT) 146 and
held as under:
"22. Insofar as the provisions of Section 2(22)(e)
are concerned, we have already extracted this
provision and taken note of the conditions/requisites
which are to be established for making provision
applicable. In Commissioner of Income Tax Vs. C.P.
Sarathy Mudaliar[1972] 83 ITR 170, the Supreme
Court had traced out the assessee of this provision
in the following manner:
Any payment by a company, not being a
company in which the public are substantially
interest, of any sum (whether as representing a
part of the assets of the company or otherwise)
made after 31.05.19987 by way of advance or
loan.
First limb
a) to a shareholder, being a person who is the
beneficial 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 percent of the voting power,
Second limb
b) or to my 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)
5 ITA No. 364/H/11
M/s Margdarshi Marketing (P) Ltd.
Third limb
c) or any payment by any such company on
behalf, or for the individual benefit, or any such
shareholder, to the extent to which the
company in either case possesses accumulated
profits.
23. It is rightly pointed out by the Bombay High
Court in Universal Medicare (P) Ltd.(supra)that
Section 2(22)(e) of the Act is not artistically worded.
Be as it may, we may reiterate that as per this
provision, the following conditions are to be
satisfied:
(1) The payer company must be a closely held
company.
(2) It applies to any sum paid by way of loan
or advance during the year to the following
persons:
(a) A shareholder holding at least 10 of voting
power in the payer company.
(b) A company in which such shareholder has
at least 20% of the voting power.
(c) A concern (other than company) in which
such shareholder has at least 20% interest.
(3) The payer company has accumulated profits
on the date of any such payment and the
payment is out of accumulated profits.
(4) The payment of loan or advance is not in
course of ordinary business activities.
24. The intention behind enacting 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 taxable in the hands of the
6 ITA No. 364/H/11
M/s Margdarshi Marketing (P) Ltd.
shareholders. Instead of distributing accumulated
profits as dividend, companies distribute them as
loan or advances to shareholders or to concern in
which such shareholders have substantial interest or
make any payment on behalf of or for the individual
benefit of such shareholder. In such an event, by
the deeming provisions, such payment by the
company is treated as dividend. The intention behind
the provisions of Section 2(22)(e) of the Act is to
tax dividend in the hands of shareholders. 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 loans or advances would
ultimately be made available to the shareholders of
the company giving the loan or advance.
25. Further, it is an admitted case that under
normal circumstances, such a loan or advance given
to the shareholders or to a concern, would not
qualify as dividend. It has been made so by legal
fiction created under Section 2(22)(e) of the Act. We
have to keep in mind that this legal provision relates
to `dividend'. Thus, by a deeming provision, it is the
definition of dividend which is enlarged. Legal fiction
does not extend to `shareholder'. When we keep in
mind this aspect, the conclusion would be obvious,
viz., loan or advance given under the conditions
specified under Section 2(22)(e) of the Act would
also be treated as dividend. The fiction has to stop
here and is not to be extended further for
broadening the concept of shareholders by way of
legal fiction. It is a common case that any company
is supposed to distribute the profits in the form of
dividend to its shareholders/members and such
dividend cannot be given to non-members. The
second category specified under Section 2(22)(e) of
the Act, viz., a concern (like the assessee herein),
which is given the loan or advance is admittedly not
a shareholder/member of the payer company.
Therefore, under no circumstance, it could be
treated as shareholder/member receiving dividend.
If the intention of the Legislature was to tax such
loan or advance as deemed dividend at the hands of
"deeming shareholder", then the Legislature would
have inserted deeming provision in respect of
shareholder as well, that has not happened. Most of
7 ITA No. 364/H/11
M/s Margdarshi Marketing (P) Ltd.
the arguments of the learned counsels for the
Revenue would stand answered, once we look into
the matter from this perspective.
26. In a case like this, the recipient would be a
shareholder by way of deeming provision. It is not
correct on the part of the Revenue to argue that if
this position is taken, then the income "is not taxed
at the hands of the recipient". Such an argument
based on the scheme of the Act as projected by the
learned counsels for the Revenue on the basis of
Sections 4, 5, 8, 14 and 56 of the Act would be of no
avail. Simple answer to this argument is that such
loan or advance, in the first place, is not an income.
Such a loan or advance has to be returned by the
recipient to the company, which has given the loan
or advance.
27. Precisely, for this very reason, the Courts have
held that if the amounts advanced are for business
transactions between the parties, such payment
would not fall within the deeming dividend under
Section 2(22)(e) of the Act.
28. Insofar as reliance upon Circular No. 495 dated
22.09.1997 issued by Central Board of Direct Taxes
is concerned, we are inclined to agree with the
observations of the Mumbai Bench decision in
Bhaumik Colour (P) Ltd. (supra)that such
observations are not binding on the Courts. Once it
is found that such loan or advance cannot be treated
as deemed dividend at the hands of such a concern
which is not a shareholder, and that according to us
is the correct legal position, such a circular would be
of no avail.
29. No doubt, the legal fiction/deemed provision
created by the Legislature has to be taken to
'magigical conclusion` as held in Andaleeb Sehgal
(supra). The Revenue wants the deeming provision
to be extended which is illogical and attempt is to
create a real legal fiction, which is not created by
the Legislature. We say at the cost of repetition that
the definition of shareholder is not enlarged by any
fiction.
30. Before we part with, some comments are to be
necessarily made by us. As pointed out above, it is
8 ITA No. 364/H/11
M/s Margdarshi Marketing (P) Ltd.
not in dispute that the conditions stipulated in
Section 2(22)(e) of the Act treating the loan and
advance as deemed dividend are established in
these cases. Therefore, it would always be open to
the Revenue to take corrective measure by treating
this dividend income at the hands of the
shareholders and tax them accordingly. As
otherwise, it would amount to escapement of income
at the hands of those shareholders."
8. The same view has also been expressed by the
Hon'ble Delhi High Court again in case of CIT Vs.
Navyug Promoters P. Ltd. (203 Taxman 618) and
Hon'ble Bombay High Court in case of CIT Vs.
Universal Medicare (P) Ltd., (324 ITR 263).
9. The ITAT, Hyderabad Bench in case of MARC
Manufacturers Pvt. Ltd. Vs. ACIT in ITA No.
555/Hyd/2008 dt. 31/08/2009 while considering
identical issue of advancement of loan to one
company, which is not a shareholder of the lender
company following the decision of ITAT Mumbai
Special Bench in case of Bhaumik Colour P. Ltd.
(supra) and other decisions held as under:
"5. It can be seen from the circular that the provisions of
amended section 2(22)(e) are to be applied only to the payments
made to the shareholders and not to any other person or concern
other than the shareholders. The Allahabad High Court in the case
of CIT vs. H.K. Mittal reported in 219 ITR 420 held that the chief
ingredient of dividend as defined in sub clause (e) of clause (22) of
section 2 of the I T Act is that the recipient should a shareholder on
the day the loan was advanced. If that fact is not established, there
cannot be a deemed dividend. Therefore, the provisions of sec.
2(22)(e) cannot be applied to MARC as it is not a shareholder in
MTAR Technologies Pvt. Ltd. (Hereinafter called as MTAR). In this
regard, the assessee relies on the declslon of the ITAT Mumbai
Bench "G" in the case of Seamist Properties Pvt. Ltd. vs. ITO
reported in (2005) 1 SOT page 142. The assessee further submits
that the provisions of sec. 2(22)( e) mention as under:
"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 not less than ten per cent of the voting
power, or to any concern in which such shareholder is a
9 ITA No. 364/H/11
M/s Margdarshi Marketing (P) Ltd.
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"
6. The intention of the legislature is clarified in circular issued by
the CBIT as at the time of amendment of clause (e) of sub section
(22) of sec. 2 is further fortified by the fact that for deduction of tax
at source. Sec. 194 provide that such deduction of tax has to be
made in the case of the payments of the nature mentioned in
clauses (a), (b), (c), (d) and (e) of sub section (22) of Section 2
only in a case where such payments were made to a shareholder.
Section 199 also indicates that adjustment of TOS would be
provided in the assessment of shareholder only. The very fact that
the provision for deduction of tax at source and adjustment of tax is
only in respect of the payments to the' shareholder would clearly
indicate that even after the amendment, the effect of clause (e) of
sub section (22) of Sec. 2 would apply only when the payment is
made to shareholder. Wherever, the tax is to be deducted at source
from a dividend or deemed dividend and the consequential effect of
giving effect to such deduction of tax at source, etc., reference was
made only to the payments to the shareholder. This would indicate
clearly that clause (e) would apply only in case of payments to the
shareholder and not to others."
Therefore, considered in the light of the ratios laid
down as aforesaid the advances cannot be treated
as deemed dividend coming within the ambit of
section 2(22)(e) of the Act.
10. Even otherwise also the amounts received by
the assessee from M/s Ushodaya Enterprises P. Ltd.
cannot be treated as deemed dividend under section
2(22)(e) of the Act. On a perusal of the order
passed by the CIT(A) for the assessment year 2006-
07, which is also in appeal before us, it is very much
evident that the CIT(A) has elaborately and
exhaustively dealt with the issue by examining all
the relevant facts and materials and thereafter has
come to the conclusion that the amounts received by
the assessee from M/s Ushodaya Enterprises is in
regular course of trade, hence, outside the purview
of section 2(22)(e) of the Act. On the contrary, the
Assessing Officer neither in course of the
assessment proceeding nor in his remand report has
brought any materials to establish the fact that the
amount received was not in regular course of trade
but in the nature of loan and advance as envisaged
10 ITA No. 364/H/11
M/s Margdarshi Marketing (P) Ltd.
u/s 2(22)(e) of the Act. In aforesaid view of the
matter, we find no reason to interfere with the order
passed by the CIT(A) in all the assessment years
under consideration and uphold the same. The
grounds raised by the department being devoid of
merit are therefore dismissed in all the appeals
under consideration.
11. In the result, all the appeals filed by the
Department are dismissed."
9. Since the issue under consideration is materially identical to
that of the case decided by the coordinate bench in assessee's
own case for AY 2005-06 to 2008-09, respectfully following the
same, we uphold the order of the CIT(A) in deleting the addition
made by the AO towards deemed dividend u/s 2(22)(e) of the IT
Act and dismiss the grounds raised by the revenue in this regard.
10. In the result, appeal of the revenue is dismissed.
Pronounced in the open court on 08-10-2013.
Sd/- Sd/-
(CHANDRA POOJARI) (SAKTIJIT DEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 11 th October, 2013.
kv
Copy to:-
1) DCIT, Circle 16(2), Hyderabad.
2) Margardarshi Marketing Pvt. Ltd., 6-3-570, Eenadu
Complex, Somajiguda, Hyderabad 500 082.
3) CIT(A)-V, Hyderabad.
4) CIT-IV Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.
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