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Judgment
PER MANISH AGARWAL, AM :
The present appeal is filed by assessee against the order dated 31.07.2019 of Ld. Commissioner of Income Tax (A)-22, New Delhi [“Ld. CIT(A)”] in Appeal No. 203/18-19/CIT(A)-22, New Delhi passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 31.03.2016 passed u/s 143(3) of the Act pertaining to Assessment Year 2013-14.
Brief facts of the case are that the assessee company has filed its return of income on 28.09.13 declaring loss of INR 21,25,468/-. The case was selected for scrutiny and the AO observed that the assessee has received loan of INR 5,68,51,605/- from M/s. ALM Infotech City Pvt. Ltd. (“ALM”) as advance against purchase of land and construction of immovable property. The AO on perusal of the shareholding pattern of the assessee company and ALM, has observed that both the companies have one common shareholder namely M/s. Jubilant Mills Pvt. Ltd. who has 42.92% shareholding in assessee company and 20.85% shareholding in ALM. The AO observed that ALM has Reserves and Surplus of INR 5,03,01,661/-and since both the companies is having one common shareholder therefore, the provision of section 2(22)(e) of the Act are applicable and accordingly, proposed to make the addition to the extent of Reserves and Surplus of ALM at INR 5,03,01,661/- as deemed dividend in the hands of assessee u/s 2(22)(e) of the Act. Claim of assessee was that in terms of MOU entered into between the parties, assessee has received funds from ALM for purchase of land and construction thereof and out of total funds received of INR 9,53,76,161/-, assessee has repaid INR 3,85,24,556/- and balance INR 5,68,51,605/- was outstanding at the year-end which being business transaction, provision of section 2(22)(e) of the Act are not applicable. However, the AO had not accepted this contention and made the addition of INR 5,03,001,661/- u/s 2(22)(e) of the Act.
In first appeal, Ld. CIT(A) by placing reliance on the judgement of Hon’ble Supreme Court in the case of Gopal & Sons (HUF) v/s CIT [2017] 77 taxmann.com 71 SC (SC) and further on the judgement of Hon’ble Supreme Court in the case of National Travel Services vs CIT [2018] 89 taxmann.com 32 (SC), confirmed the order of the AO.
Since all the Grounds of appeal of the assessee are with respect to the addition on account of deemed dividend of INR 5,03,001,661/-made u/s 2(22)(e) of the Act therefore, all are taken together for consideration.
Before us, Ld. AR for the assessee submits that under identical circumstances, advance was also taken in immediately preceding years of the Act which was held as deemed dividend u/s 2(22)(e) and was deleted by Ld. CIT(A) however, in this year, Ld. CIT(A) has not followed its earlier order and confirmed the addition. Ld.AR further submits that the transaction is commercial transaction and in terms of CBDT Circular No.19/2017 dated 12.06.2017, the issue is squarely covered wherein CBDT observed that advance which are in the nature of commercial transactions would not fall within the ambit of word “advance” u/s 2(22)(e) of the Act. Ld. AR further submits that judgment of hon’ble Apex court in the case of Gopal & Sons HUF (supra) is not applicable on the facts of the present case as in the aforesaid case, the “Karta” of HUF was the substantial shareholder therefore the Hon’ble Court was of the view that amount received by HUF is taxable u/s 2(22)(e) of the Act. Ld.AR further submits that Hon’ble Delhi High Court in the case of CIT vs Ankitech Pvt. Ltd. reported in 340 ITR 14 has held that the provisions of section 2(22)(e) of the Act are applicable to the beneficial shareholder and not to the company to whom the advance was given. This order was confirmed by Hon’ble Supreme Court in the case of CIT vs Madhur Housing & Developing Company reported in [2018] 93 taxmann.com 502 (SC). With respect to the observations of Ld. CIT(A) that such judgement is referred for the larger Bench constituted by Hon’ble Chief Justice of India of Hon’ble Supreme Court in the case of National Travel Services reported in [2018] 89 taxmann.com 332, ld. AR submits that said order has finally been settled under VSV Scheme and therefore, no reference was made to the larger Bench and thus, the order of Hon’ble Supreme Court in the case of CIT vs Madhur Housing & Developing Company (supra) still holds the water. He, therefore, prayed that the addition made be deleted. Ld.AR also placed reliance on the judgment of Co-ordinate Bench of Chennai Tribunal in the case of The Reliance Motor Company P.Ltd. vs ACIT in ITA No. 2160/Chny/2017 dated 15.06.2022.
On the other hand, Ld. Sr. DR for the Revenue vehemently supported the orders of the lower authorities and submits that Ld. CIT(A) has confirmed the addition after considering the facts and circumstances of the case and further placed reliance on the judgment of Hon’ble Supreme Court in the case of National Travel Services (supra) wherein Hon’ble Supreme Court has held that judgement given by Hon’ble Delhi High Court in the case of Ankitech P. Ltd. (supra) requires re-consideration therefore, no reliance could be placed on the said judgement and thus, he requested for the confirmation of the order of Ld. CIT(A).
Heard both parties. The sole issue in this case is whether the advance received by a company from the other company having common shareholder and the lender company has Reserves & surplus than the said sum could be taxable u/s 2(22)(e) of the Act or not. Section 2(22)(e) defines the ambit of the expression 'dividend'. All payments by way of dividend have to be taxed in the hands of the recipient of the dividend namely ‘the shareholder’. The effect of Section 2(22) is to provide an inclusive definition of the expression dividend. Clause (e) expands the nature of payments which can be classified as a dividend. Clause (e) of Section 2(22) includes a payment made by the company in which the public is not substantially interested by way of an advance or loan to a shareholder or to any concern to which such shareholder is a member or partner, subject to the fulfilment of the requirements which are spelt out in the provision. Similarly, a payment made by a company on behalf, of for the individual benefit, of any such shareholder is treated by clause (e) to be included in the expression dividend'. Consequently, the effect of clause (e) of Section 2(22) is to broaden the ambit of the expression 'dividend' by including certain payments which the company has made by way of a loan or advance or payments made on behalf of or for the individual benefit of a shareholder. The definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. Consequently, in the present case the payment, even assuming that it was a dividend, would have to be taxed not in the hands of the assessee but in the hands of the shareholder.
The Hon'ble Rajasthan High Court in the case of CIT Vs Hotel Hilltop (2008) 217 CTR (Raj) 527. The relevant portion of the decision of the Hon'ble High Court is extracted as under:
9.“The more important aspect, being the requirement of Section 2(22)(e) is, that "the payment may be made to any concern, in which such shareholder is a member, or the partner, and in which he has substantial interest, or any payment by any such company, on behalf, or for the individual benefit of any such shareholder.. " Thus, the substance of the requirement is, that the payment should be made on behalf of, or for the individual benefit of any such shareholder, obviously, the provision is intended to attract the liability of tax on the person, on whose behalf, or for whose individual benefit, the amount is paid by the company, whether to the shareholder, or to the concern firm. In which event, it would fall within the expression "deemed dividend" Obviously, income from dividend, is taxable as income from other sources, under Section 56 of the Act, and in the very nature of things, the income has to be, of the person earning the income. The assessee in the present case is not shown to be one of the persons, being shareholder. Of course the two individuals being Roop Kumar and Devendra Kumar, are the common persons, holding more than requisite amount of share holding, and are having requisite interest, in the firm, but then, thereby the deemed dividend would not be deemed dividend in the hands of the firm, rather it would obviously be deemed dividend in the hands of the individuals, on whose behalf, or on whose individual benefit, being such shareholder, the amount is paid by the company to the concern.
10.Thus, the significant requirement of Section 2(22) (e) is not shown to exist. The liability of tax, as deemed dividend, could be attracted in the hands of the individuals, being the shareholders, and not in the hands of the firm.”
The provisions of sec 2(22)(e) have laid down three situations where deemed dividend arises in the hands of the shareholders. The first situation is where loan is advanced by a closely held company to a shareholder who holds not less than 10% of the voting power in the said company. The second situation is where loan is advanced by a closely held company to a concern in which a shareholder of such company holding not less than 10% of the voting power has substantial interest in the concern. The third situation is where any payment is made by a closely held company on behalf or for the benefit of a shareholder who holds not less than 10% of the voting power in the said company. In all the three situations mentioned above, the amount of deemed dividend is required to be restricted to the accumulated profits of the company which advanced the loan/ made the payment. The three situations mentioned above are hereinafter referred to as the first limb, second limb and third limb of sec 2(22)(e) respectively.
In the Assessment Order, the AO invoked the second limb as well as the third limb of sec 2(22)(e) for holding that the loans aggregating to Rs. 5,68,51,605/-advanced by ALM to the appellant company outstanding at the end of the previous year is deemed dividend liable for tax in the hands of the appellant company. In this connection, it is important to understand the meaning of the expression "shareholder, being a person who is the beneficial owner of shares" used in sec 2(22)(e). The interpretation of the said expression has been the subject matter of the decisions of Hon'ble Delhi High Court in the case of CIT vs. Ankitech Private Limited (supra) and the Hon'ble Supreme Court in the case of CIT vs Madhur Housing and Development Co. (supra). In the case of CIT vs Ankitech Private Limited (Supra), the Hon'ble Delhi High Court held as under:
20.“In the case of CIT CP Sarathy Mudaliar (supra), provisions of Section 2(6A)(e) of the Act, 1922, which was synonymous to Section 2(22)(e) of the IT Act, 1961 came up for consideration. In the said case, members of HUF acquired shares in a company with the fund of the family. Loans were granted to HUF and the question was whether the loans could be treated as dividend income of the family falling within Section 2(64)(e) of the Act, 1922. The apex Court held that only loans advanced to shareholders could be deemed to be dividends under Section 2(64)(e) of the Act; the HUF could not be considered to be a shareholder under Section 2(6A)(e) of the Act and hence, loans given to the HUF will not be considered as loans advanced to "shareholder'" of the company and could not, therefore, be deemed to be its income. The apex Court further held that when the Act speaks of shareholder it refers to the registered shareholder.
21.The aforesaid decision of the apex Court in the case of C.P Sarathy Mudaliar (supra) has been followed by the apex Court in the case of Rameshwarlal Sanwarmal v CIT (supra). In this case, the company advanced the loans to the assessee HUF who was the beneficial owners of the shares in the company, but the shares were registered in the name of the individual Karta, who held the shares for and on behalf of the HUF On the above facts, the question before the Supreme Court was whether the loans advanced to the HUF beneficial owner of the shares-would be taxed as deemed dividend in the hands of the HUE The Supreme Court held that the HUF being only the beneficial shareholder and not a registered shareholder would not fall within the purview of Section 2(6A)(e) of the 1922 Act. The apex Court observed as follows: .....What Section 2(6A)(e) is designed to strike at is advance or loan to a 'shareholder' and the word 'shareholder' can mean only a registered shareholder. It is difficult to see how a beneficial owner of shares whose name does not appear in the register of shareholders of the company can be said to be a 'shareholder'. He may be beneficially entitled to the share but he is certainly not a 'shareholder'. It is only the person whose name is entered in the register of the shareholders of the company as the holder of the shares who can be said to be a shareholder qua the company and not the person beneficially entitled to the shares. It is the former who is a 'shareholder' within the matrix and scheme of the company law and not the latter. We are, therefore, of the view that it is only where a loan is advanced by the company to a registered shareholder and the other conditions set out in Section 2(6A)(e) are satisfied that the amount of the loan would be liable to be regarded as 'deemed dividend' within the meaning of Section 2(64)(e).
22.It is thus clear from the aforesaid pronouncement of the Hon'ble Supreme Court that to attract the first limb of the provisions of Section 2(22)(e) the payment must be to a person who is a registered holder of shares. As already mentioned the condition under the 1922 Act and the 1961 Act regarding the payee being a shareholder remains the same and it is the condition that such shareholder should be beneficial owner of the shares and the percentage of voting power that such shareholder should hold that has been prescribed as an additional condition under the 1961 Act. The word "shareholder" alone existed in the definition of dividend in the 1922 Act. The expression "shareholder" has been interpreted under the 1922 Act to mean a registered shareholder. This expression "shareholder found in the 1961 Act has to be therefore construed as applying only to registered shareholder. It is a principle of interpretation of statutes that where once certain words in an Act have received a judicial construction in one of the superior Courts, and the legislature has repeated them in a subsequent statute, the legislature must be taken to have used them according to the meaning which a Court of competent jurisdiction has given them.
In the 1961 Act, the word "shareholder" is followed by the following words "being a person who is the beneficial owner of shares". This expression used in Section 2(22)(e), both in the 1961 Act and in the amended provisions w.e.f. 1st April, 1988 only qualifies the word "shareholder" and does not in any way alter the position that the shareholder has to be a registered shareholder. These provisions also do not substitute the aforesaid requirement to a requirement of merely holding a beneficial interest in the shares without being a registered holder of shares. The expression "being" is a present participle. A participle is a word which is partly a verb and partly an adjective. In Section 2(22)(e) the present participle "being" is used to described the noun 'shareholder' like an adjective. The expression "being a person who is the beneficial Owner of shares" is therefore a further requirement before a shareholder can be said to fall within the parameters of Section 2(22)(e) of the Act. In the 196l Act, Section 2(22)(e) imposes a further condition that the shareholder has also to be 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 poser. It is not possible to accept the contention of the learned Departmental Representative that under the 1961 Act there is no requirement of a shareholder being a registered holder and that even a beneficial ownership of shares would be sufficient.
The expression "shareholder being a person who is the beneficial owner of shares" referred to in the first limb of Section 2(22)(e) refers to both a registered shareholder and beneficial shareholder If a person is a registered shareholder but not the beneficial then the provision of Section 2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the first limb of provisions of Section 2(22)(e) will not apply.”
The abovementioned decision of the Hon'ble Delhi High Court has been affirmed by the Hon'ble Supreme Court in the case of CIT Vs Madhur Housing and Development Co. (Supra). The Hon'ble Supreme Court held that the judgement of the Delhi High Court is a detailed judgement going into sec 2(22) (e) of the Income Tax Act which arrives at the correct construction of the said section that it does not wish to add anything to the judgement except saying that it agrees with the said judgement.
The Hon'ble Madras High Court in the case of Pr. CIT vs Ennore Cargo Terminal P Ltd reported in (2018) 406 ITR 477 (Mad) has also held that the deemed dividend can only be assessed in the hands of the registered shareholder for whose benefit the money was advanced. The hon’ble court further considered the judgement of hon’ble Apex court in the case of Gopal & Co (supra) and hold the same is not applicable. The relevant portion of the decision of the Hon'ble High Court is extracted as under:
4.“Insofar as Question Nos.3 and 4 are concerned, the following brief facts are required to be noticed:
4.1.he assessee-company, evidently, received a capital advance in a sum of Rs.1,09,50,000/- from an entity by the name of Indev Logistics Pvt. Ltd. The assessee-company as well as the said entity, i.e. Indev Logistics Pvt. Ltd., admittedly have common shareholders. The shares in the assessee company to the extent of 50% are held by Mr. Xavier Britto, while the balance shares are held by Smt. Vimalarani Britto. In so far as Indev Logistics Pvt. Ltd. is concerned, shares are held likewise by the said individuals, though in a different ratio. Mr. Xavier Britto holds 60% of the shares in Indev Logistics Pvt. Ltd., while Smt. Vimalarani Britto holds the balance 40% shares in the said entity.
4.2.The Revenue seeks to assess as income the capital advance received by the assessee-company from Indev Logistics Pvt. Ltd. on the ground that it is deemed dividend received by the assessee company for the benefit of the registered shareholder. For this purpose, the provisions of Section 2(22)(e) of the Income-tax Act, 1961 (in short 'the Act') is sought to be relied upon. The Tribunal has rejected the said contention of the Revenue, principally, on the ground that deemed dividend can only be assessed in the hands of the registered shareholder for whose benefit the money was advanced.
4.3.As indicated above, there is no dispute that the assessee did receive capital advance from Indev Logistics Pvt. Ltd. There is also no dispute that there are common shareholders both in the assessee-company and Indev Logistics Pvt. Ltd. Therefore, quite correctly, as noted by the Tribunal, though, the advance received by the assessee company may have been for the benefit of the aforementioned registered shareholders, it could only be assessed in the hands of those registered shareholders and not in the hands of the assessee-company.
4.4.In our view, on a plain reading of the provisions of Section 2 (22) (e) of the Act, no other conclusion can be reached. As a matter of fact, a Division Bench of this Court, in the case of Commissioner of Income Tax VS. Printwave Services P. Ltd., (2015) 373 ITR 665 (Mad.), has reached a somewhat similar conclusion.
5.Mr. Senthil Kumar, however, contends to the contrary and relies upon the judgement of the Supreme Court in Gopal and Sons (HUF) VS. Commissioner of Income-tax, Kolkata-XI, (2017) 77 taxmann.com 71 (SC).
5.1.In our view, the question of law considered by the Supreme Court in the case of Gopal and Sons (supra) was different from the issue which arises in the present matter. The question of law which the Supreme Court was called upon to consider was whether loans and advances received by a HUF could be deemed as a dividend within the meaning of Section 2(22)(e) of the Act. The assessee in that case was the HUF and the payment in question was made to the HUF. The shares were held by the Karta of the HUF. It is in this context that the Supreme Court came to the conclusion that HUF was the beneficial shareholder.
5.2.In the instant case, however, both the registered and beneficial shareholders are two individuals and not the assessee-company. Therefore, in our view, the judgement of the Supreme Court does not rule on the issue which has come up for consideration in the instant matter.
6.Accordingly, in so far as questions Nos. 3 and 4 are concerned, we find that no interference is called for with the view taken by the Tribunal via the impugned order. In these circumstances, the Revenue's appeal, i.e. T.C. (A) No. 105 of 2017, pertaining to AY 2007-08, with regard to the said questions, is dismissed.”
The coordinate bench of ITAT Chennai has also considered this issue in the case of Pallava Resorts Private Limited Vs ITO reported in (2022) 143 taxmann.com 08 (Chennai-Trib) and held that the amount of loan received by the assessee company from its holding company is not taxable as deemed dividend u/s 2(22)(e) in the hands of the assessee company and the same is taxable in the hands of the common registered shareholders only.
Regarding the observations of the ld. CIT(A) that in the case of CIT vs National Travel Services [2012] reported in 347 ITR 305 (Del), the Hon'ble Delhi Court has taken a contrary view which matter was travelled before the Hon'ble Supreme Court. The Hon'ble Supreme Court in National Travel Services v. CIT reported in [2018] 401 ITR 154 (SC) has referred the matter to the Hon'ble Chief Justice of India in order to constitute a larger bench for reconsideration of the issue whether the shareholder should be both registered and beneficial.
Further it is a matter of fact that the assessee in the case of National Travel Services v. CIT (supra) has withdrawn the appeal referred by the Hon'ble Supreme Court to the Hon'ble Chief Justice of India for constitution of a larger bench by opting under Direct Tax Vivad se Vishwas Act, 2020. The Hon'ble Supreme Court in Interlocutory Application No. 46492 of 2021 vide order dated 10.08.2021 dismissed the appeals as withdrawn. Thus, when the case of National Travel Services v. CIT (supra) has been settled under Direct Tax Vivad se Vishwas Scheme, no binding precedent arises from such judgement and accordingly the case of CIT v. Ankitech (P.) Ltd (supra) as affirmed by the Hon'ble Supreme Court is the only binding judgement on the issue that a shareholder should be both registered and beneficial.
In this context, reliance is placed on the decision of the Mumbai Benches of the ITAT in the case of Neha Home Builders (P,) Ltd v. DCIT reported in [2018] 98 taxmann.com 465 (Mum-Trib), wherein the Tribunal has held as follows:
"24.“National Travel case neither any decision was rendered nor was any stay on applicability of decision of Hon'ble Supreme Court in case of CIT v. Ankitech P. Ltd. in Civil Appeal No.3961 of 2013 (Sic.) given. In that case matter was only referred to larger bench for reconsideration and nothing has been decided yet. Hence, till date Larger Bench not decided the case,' the earlier law will hold good and be in operation and binding on all courts and tribunal throughout; the territory of India, As per Article 141 of the Constitution of India which lays down that the law declared by the Supreme Court shall be binding on all courts throughout the territory of India. Earlier in case of CIT v. Ankitech P. Ltd. in Civil Appeal No.3961 of 2013 (sic.) hon'ble Supreme Court lay down the Law that for attracting section 2(22)(e) shareholder needs to be registered and beneficial shareholder, in the present case it is a settled fact that the assessee is neither a registered nor a beneficial shareholder. Thus with no stretch of imagination the assessee can be covered under the definition of Section 2(22)(2) i.e., deemed dividend.
25.The similar issue was come before the Hon'ble Kerala High Court in case of CIT v. Settlement Commission (IT & WT) [2009] 176 Taxman 421 where the Hon'ble High Court held as under:-
"In this case, the Settlement Commission has rejected Ext. P2 on the ground that the issue raised is a debatable issue, But, I feel that when there is a decision of the Apex Court, no Inferior Court or Tribunal can say that the issue is a debatable issue for the reason that a Bench of two Judges of the Apex Court has doubted the correctness of the decision of the Constitution Bench. Even assuming there is a final judgement of a two Judges Bench of the Apex Court, the same has to be ignored and Inferior Courts and Tribunals are bound to follow the decision of the Constitution Bench in view of the law relating to precedents and also article 741 of the Constitution of India. So, the rejection of Ext. P2 application is unjustified."
26.In view of the above, the decision of the Hon'ble Supreme Court as on today established binding. Under Article 141 of the Constitution, ratio of decision of the Hon'ble Supreme Court and principle underlying decision is binding. It is most crucial to note that in that case matter was referred to reconsider the earlier decision with their observation that for applying deemed dividend provision it is sufficient if the shareholder is beneficial shareholder. It need not be necessary that shareholder must be registered shareholder. Because as per earlier decision for applying deemed dividend shareholder must satisfy both character of shareholder i.e. Registered as well as beneficial shareholder. Thus, as per observation of this decision also shareholder needs to be beneficial Shareholder. If the sharehold3r is not a beneficial shareholder then as per this observation also provisions of deemed dividend will not apply. Hence, all the decision supports the contention of assessee that deemed divided cannot be apply in assessee's hand as it is neither registered nor beneficial shareholder of EIPL."
The Ahmedabad Bench of the ITAT in the case of DCIT v. Aaryavart Infrastructure P. Ltd in ITA No.2105/Ahd/2015 has taken note of the above fact and observed as follows:
"When the matter came up before the Larger Bench of the Supreme Court, it was dismissed as the assessee had settled the dispute under the Vivad se Vishwas scheme.
The said order is reported in National Travel Service vs. Commissioner of Income Tax (2021) 111 CCH 0227 ISSC."
In view of the above, having withdrawn the appeal by the assessee in the case of National Travel Service v. CIT (supra), as on date the binding judgement on the issue of the expression 'shareholder' is that of the judgement of the Hon'ble Delhi High Court in the case of CIT v. Ankitech (P.) Ltd (supra) as affirmed by the Hon'ble Supreme Court in the case of CIT v. Madhur Housing & Development Co. (supra). Thus, respectfully following the same, we hold that the shareholder referred to in section 2(22)(e) of Act implies registered and beneficial shareholder. Since in the instant case M/s. Jubilant Mills Pvt. Ltd. is the common shareholder in both the lenders and the appellant company but the appellant company itself is not a shareholder in the lender company. This critical difference brings the assessee out of purview of section 2(22)(e) of the Act and thus, by respectfully following the aforesaid judgements of binding nature of the hon’ble Supreme court and jurisdictional high court, it is held that the advance received by the assessee cannot be considered as deemed dividend u/s 2(22)(e) of the Act. Accordingly, we delete the addition made in the hands of the assessee on this score. All the grounds of appeal of the assessee are thus allowed.
In the result, the appeal of the assessee is allowed.