Whether when assessee company makes advances in favour of its Director holding 90% stake in the company, such loans are to be treated as deemed dividend in the hands of the company or the Director?

ACIT Vs. Oxford Softeck Pvt. Ltd. (ITAT Delhi)- If it is supposed that all the conditions are fulfilled but then also the same cannot be added as income in the hands of the payer company as such amount can be added only to the income of a person as dividend who is a shareholder to whom such loan and advances made. Keeping in view these facts and the aforementioned case law relied upon by ld. CIT(A) and also the provisions of the Act, we are of the opinion that addition in the hands of the assessee company has rightly been deleted by ld. CIT(A) and to that extent we uphold his order and it is held that addition has rightly been deleted in the hands of the assessee company.

ACIT Vs. Oxford Softeck Pvt. Ltd.,

Decided by – ITAT Delhi

ITA No. 1138/Del/2011

Assessment Year:  2005- 06

Decided on- 28.04.2011

ORDER

PER I.P. BANSAL, J.M.

This is an appeal filed by the revenue. It is directed against order passed by ld. CIT(A) dated 16.11.2010 for A.Y. 2005-06. Grounds of appeal read as under: –

1. “That on the facts and circumstances of the case as well as in law the ld. CIT(A) has erred in deleting the addition of Rs. 45,48,330/- made by the AO u/s 2(22)(e) of the I. T. Act.

2. That the appellant craves to be allowed to add any fresh grounds ofappeal and/or delete or amend any of the grounds of appeal.”2. During the course of assessment proceedings, it was noticed by the AO that the assessee company as on 31.3.2005 had advanced a loan of Rs. 26,66,722/- to Shri Naresh Kumar who was Director and was holding 90% of the share of the assessee company. The AO issued show cause notice to the assessee company as to why the said amount should not be treated as deemed dividend u/s 2(22)(e) of the Income Tax Act, 1961 (Act) and from the detail submitted, it was noticed that the maximum amount of loan outstanding on a particular day was an amount of Rs. 45,48,330/- in the month of June, 2004 and the said amount has been treated as deemed dividend in the hands of the assessee company by applying the provisions of sec. 2(22)(e) of the Act. Ld. CIT(A) has deleted such addition on the ground that the addition, if any, could not be made in the hands of the assessee company being payer of the amount and if the same could be added only in the hands of the Director Shri Naresh Kumar. He has also directed the AO to add the said amount of Rs. 45,48,330/- as deemed dividend u/s 2(22)(e) in the hands of Shri Naresh Kumar. It is against those observations of ld. CIT(A) the revenue has filed the aforementioned appeal. While holding that the said amount could not be added to the income of the assessee company ld. CIT(A) has relied upon following decisions: –

1. CIT Vs. Raj Kumar 181 Taxman 155 (Del.), wherein tracing the history of sec. 2(22)(e) which contained in sec. 2(6A) of Indian Income Tax Act, 1922, it was observed that the purpose of bringing such provision was plainly to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons, who managed such closely held companies, should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of an advance or loan.

2. ACIT Vs. Bhaumik Colours Pvt. Ltd. 27 SOT 270 (SB) (Mum.), wherein answer to the question “whether deemed dividend 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” was answered in affirmation.

3. CIT Vs. Hotel Hilltop 213 ITR 116, wherein it was held that deemed dividend cannot be brought to tax in the hands of a non-shareholder.

4. C.P. Sarthi Mudalia 83 ITR 170 (SC) while considering the provisions of sec. 2(6A)(e) of Income Tax Act, 1922, it was held that shareholder in the context of deemed dividend referred to only registered shareholder.

3. Notice of hearing was sent to assessee. However, on the fixed date of hearing none appeared on behalf of assessee. Hence, we proceed to decide the present appeal, ex-parte qua the assessee after hearing ld. DR.

4. After narrating the facts, ld. DR relying upon the assessment order pleaded that AO was right in making addition in the hands of the assessee company and it has wrongly been deleted by ld. CIT(A). He pleaded that order of CIT(A) should be set aside and that of AO be restored.

5. We have carefully considered the submission of ld. DR. We have also carefully gone through the assessment order as well as order passed by ld. CIT(A). We have also carefully gone through the case law relied upon by ld. CIT(A) the substance of which has already been mentioned in the earlier part of this order. Sec. 2(22) defines dividend and clause (e) read as under: –

2(22) ‘dividend includes –

(a) to (e)

(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 31.5.1987, 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 (hereinafter 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 bare perusal of aforementioned provision would show that the payment would acquire the attribute of a dividend if the following conditions are fulfilled: –

(i) “The company making the payment is one in which public are not substantially interested.

(ii) Money should be paid by the company to a shareholder holding not less than ten per cent (10%) of the voting power of the said company. It would make no difference if the payment was out of the assets of the company or otherwise.

(iii) The money should be paid either by way of an advance or loan or it may be “any payment” which the company may make on behalf of or for the individual benefit of any shareholder or also to any concern in which such shareholder is a member or a partner and in which he is substantially interested.

(iv) And lastly, the limiting factor being that these payments must be, to the extent of accumulated profits, possessed by such a company.”

7. If it is supposed that all the conditions are fulfilled but then also the same cannot be added as income in the hands of the payer company as such amount can be added only to the income of a person as dividend who is a shareholder to whom such loan and advances made. Keeping in view these facts and the aforementioned case law relied upon by ld. CIT(A) and also the provisions of the Act, we are of the opinion that addition in the hands of the assessee company has rightly been deleted by ld. CIT(A) and to that extent we uphold his order and it is held that addition has rightly been deleted in the hands of the assessee company. However, to assess any amount as dividend in the hands of the recipient, one has to see that whether or not all the aforementioned four conditions as contained in provision of sec. 2(22)(e) are fulfilled or not and unless the conditions specified in sec. 2(22)(e) are fulfilled, it cannot be said that the said amount straightway is liable to be assessed in the hands of the recipient. Therefore, the directions of ld. CIT(A) that the said amount should be added in the hands of Shri Naresh Kumar are modified to the extent that the same can be added in the hands of Shri Naresh Kumar if the loan and advance is asses-sable as deemed dividend as per provisions of law and said Shri Naresh Kumar should be granted with a reasonable opportunity of hearing before adding the said amount to his income as this will be the bare requirement of law to afford the reasonable opportunity to other person, if any, action is taken against him. We, therefore, found no justification in the direction given by ld. CIT(A) to the AO to straightway add the said amount in the hands of Shri Naresh Kumar as it will be the requirement of law to give him a reasonable opportunity of hearing and thereafter to decide the issue as per provisions of law that whether or not the said amount can be added to the income of Shri Naresh Kumar. With these observations, we dismiss the appeal filed by the revenue.