Case Law Details

Case Name : KIIC Investment Company Vs DCIT (IT) (ITAT Mumbai)
Appeal Number : ITA NOS. 1381/MUM/2017
Date of Judgement/Order : 06/11/2018
Related Assessment Year : 2009-10 & 2010-11
Courts : All ITAT (7308) ITAT Mumbai (2108)

KIIC Investment Company Vs DCIT (IT) (ITAT Mumbai)

Conclusion: Amount advanced by Portescap to Videojet in which assessee was a common shareholder holding substantial shareholding could not be termed as loan falling within the purview of sec. 2(22)(e) as the same was shown in the balance-sheet of Portescap as well as Videojet as inter-corporate deposit (ICD).

Held: Assessee-company was a common shareholder holding substantial shareholding both in Portescap as well as Videojet. AO was of a belief that the amount of Rs.13 crores given by Portescap to Videojet attracted the deeming provision of Sec. 2(22)(e) in the hands of assessee who was a common shareholder in the two concerns. It was held amount advanced by Portescap to Videojet  was shown in the balance-sheet of Portescap as inter-corporate deposit (ICD) and same was the position in balance-sheet of Videojet . Thus, it was abundantly clear that  parties to the transaction, had transacted considering the same to be one of an ICD and AO was wrong in asserting that it was a case of ‘loan’ so as to fall within the purview of section 2(22)(e), therefore, addition was deleted.

FULL TEXT OF THE ITAT JUDGEMENT

The captioned two appeals are by the same assessee for Assessment Years 2009-10 and 2010-11 and since they involve common issues, they have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.

2. Pertinently, the substantive dispute in both the appeals revolves around invoking of Sec. 2(22)(e) of the Act by the Assessing Officer to tax certain amount in the hands of the assessee as ‘deemed dividend’. We may first take-up the appeal of assessee for Assessment Year 2009-10, which is directed against the order dated 30.12.2016 passed by the Assessing Officer u/s 147 r.w.s. 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) giving effect to the directions of Dispute Resolution Panel-I, Mumbai (DRP) dated 23.12.2016.

3. Since assessee has raised multiple Grounds, we deem it fit and proper to reproduce the Grounds raised in the Memo of appeal, which read as under :-

“Ground 1 – Re-opening is bad in law in the absence of any income/escapement of assessment and if at all can only be on protective basis

1.1 In the facts and circumstances of the case and in law, the Assessing Officer (AO) erred in reopening the assessment and passing assessment order under Section 147 / 148 read with Section 143(3) of the Income Tax Act, 1961 (Act) determining total income of the Appellant at Rs. 13,00,00,000 and the Dispute Resolution Panel (DRP) erred in confirming the same.

1.2 In the facts and circumstances of the case and in law, the AO erred in re-opening the assessment and the DRP erred confirming the same by treating the Inter Corporate Deposits (ICDs) of Rs. 13,00,00,000 given by Portescap India Private Limited (Portescap) with Videojet Technologies India Private Limited (Videojet) (both wholly owned Indian subsidiaries of the Appellant) as deemed dividend under Section 2(22)(e) of the Act notwithstanding that Videojet was already assessed on this deemed dividend income under Section 2(22)(e) of the Act on substantive basis.

1.3 The AO and the DRP failed to appreciate that the re-assessment is contrary to the CBDT Circular 495 dated 22 September 1987 and the Supreme Court decision in Gopal and Sons (HUF) v. CIT which lays down that the deemed dividend under Section 2(22)(e) of the Act is taxable in the case of Recipient i.e. Videojet as is also the fact in the Appellant’s case, and therefore the re-assessment of the Appellant was not warranted under Section 152 of the Act, and without prejudice, reassessment if any of the Appellant, could only be on protective basis.

1.4 Without prejudice, the DRP further erred in not adjudicating the Appellant’s Objection No. 1 challenging the validity of the re-opening on the basis that powers to decide the validity of the re-assessment proceedings or the issue of notice under Section 148 of the Act is not within the purview of DRP under Section 144C(5) of the Act.

1.5 The Assesse prays that the action of re-opening the assessment is erroneous, unwarranted and bad in law and be quashed or without prejudice, the assessment of deemed dividend of Rs. 13,00,00,000 can only be on protective basis.

Ground 2 – Inter Corporate Deposit (ICDs) of Rs.13,00,00,000 erroneously treated as Loan and taxed as deemed dividend under Section 2(22)(e) of the Act (this ground without prejudice to Ground 1)

2.1 On the facts and circumstances of the case and in law, the AO erred in concluding and the DRP erred in confirming the taxation of ICDs of Rs. 13,00,00,000 placed by Portescap with Videojet as deemed dividend under Section 2(22)(e) of the Act.

2.2 The AO and the DRP further erred in re- characterising the ICDs of Rs.13,00,00,000 as Loan and taxing it as deemed dividend under Section 2(22)(e) of the Act without appreciating the distinction between ICDs and Loans which cannot be ignored merely because it is related party transaction or due to accounting treatment or any other procedural aspects.

2.3 The Appellant prays that re-characterising the ICDs as Loan and taxing it is as deemed dividend under Section 2(22)(e) of the Act is erroneous, unwarranted and be deleted.

Ground 3 – The alleged deemed dividend erroneously taxed at 42.23 percent on gross basis (this ground without prejudice to Ground 1 and 2)

3.1 On the facts and circumstances of the case and in law, the AO erred in concluding and the DRP erred in confirming the taxation of alleged deemed dividend at 42.23 percent on gross basis.

3.2 The AO and the DRP failed to appreciate that the Appellant is a tax resident of Mauritius thereby eligible to be governed by the provisions of the India-Mauritius Tax Treaty (Tax Treaty) under Section 90(2) of the Act and thus eligible for lower rate of 5 percent taxation of dividend income under Article 10 thereof including on deemed dividend under Section 2(22)(e) of the Act and the term paid therein cannot be narrowly construed to mean direct payment to shareholders and includes any payments for the benefit of or on behalf of its shareholders including under the Section 2(22)(e) of the Act as deemed dividend.

3.3 The Appellant prays that taxing deemed dividend at 42.23 percent on gross basis is erroneous, unwarranted and the AO be directed to restrict the taxation of the alleged deemed dividend to 5 percent under Article 10 of the Tax Treaty.

3.4 Without prejudiced to above, if at all the dividend is to be taxed under provisions of the Act it should be taxed at 20 percent on gross basis under Sect 115A of the Act.”

4. Apart therefrom, the appellant has also raised an additional Ground, which reads as under :-

“Ground 1 – Alleged deemed dividend not taxable under the India-Mauritius Tax Treaty

1.1 On the facts and circumstances of the case and in law and without prejudice, with respect to taxation of inter-corporate deposit of Rs.13.00,00,000 as deemed dividend under Section 2(22)(e) of the Act, the Assessing Officer (AO) and the Dispute Resolution Panel erred in not granting benefit of Article 7 and / or Article 22 of the India-Mauritius Tax Treaty post their conclusion that the provisions of Article 10 of the Tax Treaty were not applicable.

1.2 The AO / the DRP failed to appreciate that the Appellant is a tax resident of Mauritius and under Section 90(2) of the Act, is entitled to the benefit of India-Mauritius Tax Treaty and the alleged deemed dividend is not taxable under Article 7 and / or Article 22 of the Tax Treaty.

1.3 The Appellant prays that pursuant to aforesaid beneficial provisions of the Tax Treaty, the taxation of impugned addition of ICD of Rs. 13,00,00,000 as deemed dividend under Section 2(22)(e) of the Act and taxing it at 21.115 percent on gross basis under Section 115A of the Act is erroneous, unwarranted and be deleted.”

5. Before proceeding further, the background of the controversy before us can be summarised as follows. The appellant before us is a foreign company, which is incorporated in and tax resident of Mauritius. Its principal activity is to act as investment holding concern. Notably, assessee is a common shareholder in two concerns, namely, Portescap India Pvt. Ltd. (hereinafter referred to as ‘Portescap’) and Videojet Technologies (I) Pvt. Ltd. (hereinafter referred to as ‘Videojet’) inasmuch as it directly holds almost 99.99% of the shares of the former and 99.88% of the shares in the latter company. In the impugned assessment which has been initiated by taking recourse to Sections 147/148 of the Act, the Assessing Officer notes that Portescap had advanced monies totalling to Rs. 13 crores to Videojet during the previous year relevant to the assessment year under consideration. The Assessing Officer after noticing the common shareholding of the assessee in the aforesaid two concerns, examined the applicability of Sec. 2(22)(e) of the Act qua the amount of Rs.13 crores advanced by Portescap to Videojet. As per the Assessing Officer, the amount of Rs.13 crores advanced by Portescap to Videojet falls within the purview of Sec. 2(22)(e) of the Act and accordingly, the assessee-company being the common shareholder, the said amount was treated as ‘deemed dividend’ u/s 2(22)(e) of the Act in the hands of the assessee-company. The relevant discussion in the assessment order also reveals the defence sought to be put-up by the assessee. As per the assessee, the amount advanced by Portescap to Videojet was not in the nature of a loan or advance as understood for the purposes of Sec. 2(22)(e) of the Act inasmuch it was an Inter-Corporate Deposit (ICD) placed by Portescap with Videojet. The aforesaid plea was sought to be supported by pointing out that a loan or advance is quite distinct from an ICD and, therefore, the said amount would not fall within the purview of Sec. 2(22)(e) of the Act. Be that as it may, we may not dwell much on the merit of the controversy at the present since the preliminary objection of the assessee is with regard to the validity of the proceedings initiated by issuance of notice under Sections 147/148 of the Act. As per the appellant, initiation of proceedings under Section 147/148 of the Act is legally untenable and since the said issue goes to the root of jurisdiction, the same is being dealt with at the threshold.

6. In order to appreciate the controversy regarding reopening of the assessment by issuance of notice u/s 148 of the Act, the following facts are relevant. As per the discussion in the assessment order, notice u/s 148 of the Act was issued to the assessee on 18.07.2014 after recording reasons that certain income chargeable to tax had escaped assessment. In response, assessee vide communication dated 21.08.2014 filed a return of income and sought a copy of the reasons recorded for reopening of assessment. In terms of pages 5 & 6 of the Paper Book, it is noticed that the Assessing Officer vide communication dated 09.01.2015 provided the assessee with the copy of reasons for reopening the assessment, which read as under :-

“REASONS OF REOPENING U/s 148(2); A.Y 2009-10

M/s. Kollmorgan India Investment Company; PAN – Not available

Date : 18.07.2014

M/s Kollmorgan India Investment Company is a Mauritius based company (hitherto refer ‘the company’). Information in regards to ‘the company’ has been received from DCIT-8(2), Mumbai vide its letter dated 03.07.2013. it was stated in the said letter that M/s. Portescape India Pvt. Ltd. has given loan to viz. M/s. Videojet Technologies (I) Pvt. Ltd. of Rs. 13 Crore. Since M/s. Kollmorgan India Investment Company is a registered shareholder having substantial interest in the M/s. Portescape India Pvt. Ltd. as well as M/s. Videojet Technologies (I) Pvt. Ltd. As per details available, ‘the company’ holds 99.999% shareholding in M/s. Portescape India Pvt. Ltd. and 99.888% shareholding in M/s. Videojet Technologies (I) Pvt. Ltd. Clearly deemed dividend had arrived in the hands of ‘the company’ under section 2(22)(e) of the Income Tax act, 1961, which the ‘the company’ should have offered for taxation in India. From the information received in this office, it is seen that M/s. Portescape India Pvt. Ltd. has accumulated profit of Rs.127.64 Crores during the year. As the Kollmorgan India Investment company has not filed return of income in India and had to offered deemed dividend as prescribed in section 2(22)(e) of the Act, for taxation in India, the income had escaped assessment for AY 2009-10 in the case. In this case, explanation 2(a) of section 147 is applicable.

In view of the above, I have reasons to believe that income chargeable to tax of the M/s. Kollmorgan India Investment Company, has escaped assessment for A.Y 2009-10 (FY 2008-09) in the meaning of section 147 of I-T Act, 1961. Further, the income chargeable to tax which has escaped assessment amounts to or likely to amount to One lakh rupees or more for the year.

This case doesn’t fall under the first proviso to section 147, as no assessment u/s 143(3) or u/s 147 has been made in this case for the A.Y 2009-10. The necessary approval of the Addl. DIT(IT)-rg. 3 has been obtained on 18.07.2014 on 18.07.2014 for reopening of the assessment of M/s. Kollmorgan India Investment Company for the AY 2009-10.

Accordingly, issue notice u/s. 148 of the I-T Act, 1961.

DDIT(IT)-3(1), Mumbai”

7. A perusal of the aforesaid reasons would show that as per the Assessing Officer, an information was received from DCIT-8(2), Mumbai vide communication dated 03.07.2013 that Portescap had given loan to Videojet of Rs. 13 crores; that the assessee was a registered shareholder having substantial interest in Portescap as well as in Videojet; that Portescap had accumulated profits of Rs.127.64 crores during the year and accordingly, deemed dividend within the meaning of Sec. 2(22)(e) of the Act “had arrived in the hands” of the assessee-company. Since the said income was not offered for taxation as assessee had not filed any return of income, the Assessing Officer makes a reference to Explanation-2(a) to Sec. 147 of the Act and formed a belief that income chargeable to tax had escaped assessment. Ostensibly, the income alleged to be escaping assessment is a sum of Rs.13 crores which as per the Assessing Officer is liable to be assessed in the hands of the assessee-company as ‘deemed dividend’ within the meaning of Sec. 2(22)(e) of the Act.

8. At the time of hearing, the learned representative for the assessee has made varied submissions challenging the validity of reopening of the assessment. One of the foremost pleas raised is to the effect that at the time when the Assessing Officer recorded the reasons for reopening, there was no income which had escaped assessment inasmuch as the aforestated amount was already assessed as ‘deemed dividend’; firstly, in the hands of Portescap on a protective basis and in the hands of Videojet on a substantive basis. Elaborating the point, the learned representative referred to the assessment orders passed in the case of Portescap and Videojet u/s 143(3) of the Act for Assessment Year 2009-10 dated 21.12.2012 and 27.02.2014 respectively. Copies of such orders have been placed in the Paper Book at pages 59 to 75 and 51 to 58 respectively. Secondly, it is pointed out that the inference drawn by the Assessing Officer about the escapement of income in the hands of the assessee-company is expressly contrary to the circular of CBDT no. 495 dated 22.09.1987 in terms of which income by way of “deemed dividend” is assessable in the hands of the recipient concern, if it is other than a registered shareholder, and not in the hands of a registered shareholder, as is sought to be done by the Assessing Officer in the present case. According to the learned representative, it is an accepted proposition that the income-tax authorities cannot ignore the relevant circulars of CBDT as the same are binding on the departmental authorities, and, thus the belief of the Assessing Officer on escapement of income is untenable.

9. On the other hand, the ld. CIT-DR appearing for the Revenue justified the reasons recorded for initiation of proceedings under Sections 147/148 of the Act, as according to him, the assessee being the common shareholder in the two concerns, Portescap and Videojet, the amount advanced by Portescap to Videojet was of the nature covered by Sec. 2(22)(e) of the Act and, therefore, the impugned sum has been rightly sought to be assessed in the hands of the assessee-company. On this basis, the ld. CIT-DR has justified the applicability of Sec. 2(22)(e) of the Act in the hands of the assessee and has accordingly defended the reopening of assessment in order to bring to assessment such income.

10. We have carefully considered the rival stands. Sec. 147 of the Act prescribes that if the Assessing Officer has reasons to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax, which has escaped assessment and which comes to his notice subsequently in the course of proceedings under the section. Ostensibly, the power vested with the Assessing Officer to make an assessment or reassessment in terms of Sec. 147 is quite wide, so however, the same is not absolute. Notably, the jurisdiction u/s 147 of the Act can be assumed only if he has reason to believe that certain income had escaped assessment. Thus, assumption of jurisdiction u/s 147 of the Act to assess or reassess an income is not on the ipsy dipsy of the Assessing Officer, but there must exist material which will enable the Assessing Officer to form a belief that certain income has escaped assessment. It is a well-settled proposition that reasons for formation of belief about escapement must have a rational connection or a relevant bearing on the formation of belief, as can be understood from the judgment of the Hon’ble Supreme Court in the case of ITO vs Lakhmani Mewal Das103 ITR 437 (SC).

11. As the phraseology of Sec. 147 of the Act shows, the whole exercise envisaged therein is to assess the income which had escaped assessment. The expression “escaped assessment” would connote an income which has gone unnoticed by the Assessing Officer and because of such reason, it had escaped assessment. Thus, a natural corollary would be that once a particular income has been subjected to assessment in a particular year, it could not be said to have escaped assessment so as to require the Assessing Officer to form a belief contemplated in Sec. 147 of the Act.

12. In this background, we may now examine the case set-up by the assessee before us. As our earlier discussion reveals, the sum and substance of the dispute is with regard to assessment of Rs. 13 crores in the hands of the assessee as deemed dividend by invoking Sec. 2(22)(e) of the Act. The relevant factual matrix has been noted by us elsewhere in this order, but to recapitulate, it would suffice to notice that Portescap advanced Rs. 13 crores to another concern, namely, Videojet. The assessee-company is a common shareholder holding substantial shareholding both in Portescap as well as Videojet. At this stage, we may refer to Sec. 2(22)(e) of the Act which creates a fiction whereby an amount which is otherwise paid as loan or advance is sought to be assessed as ‘dividend’, subject to fulfilment of other conditions prescribed in the section. Broadly speaking, any loan or advance made by a corporate entity to its shareholder or on behalf of a shareholder or for the individual benefit of a shareholder can be deemed to be a payment by way of dividend in terms of Sec. 2(22)(e) of the Act subject to fulfilment of other conditions. In the present case, at the time of recording the reasons contemplated in Sec. 147 of the Act, the Assessing Officer came to a belief that the amount of Rs.13 crores given by Portescap to Videojet attracted the deeming provision of Sec. 2(22)(e) of the Act in the hands of the assessee who was a common shareholder in the two concerns. At this stage, we are not concerned with the correctness or otherwise of such stand of the Assessing Officer, but we are only trying to evaluate as to whether under the given circumstances, the assumption of jurisdiction under Sections 147/148 of the Act is competent in law. The precise point is as to whether on the date of recording of reasons, could it be said that the aforesaid income constituted an income chargeable to tax which had escaped assessment.

13. In this context, our attention has been invited to the assessment in the case of Portescap for Assessment Year 2009-10 u/s 143(3) of the Act dated 21.12.2012, a copy of which is placed at page 59 to 75 of the Paper Book. In this assessment, the Assessing Officer examined the applicability of Sec. 2(22)(e) of the Act qua the amount advanced by Portescap to Videojet. By way of a detailed discussion which, inter-alia, included his examination of the shareholding pattern of the two concerns, existence of accumulated profits in the hands of Portescap, the nature of advance as being an ICD or not, etc., the Assessing Officer finally in para 7.13 of his order treated the said amount as ‘deemed dividend’ which “shall be taxed in the hands of M/s. Videojet Technologies (India) Pvt. Ltd.”. In the case of Portescap, the Assessing Officer taxed the amount of Rs. 13 crores as ‘deemed dividend’ u/s 2(22)(e) of the Act on a protective basis. The Assessing Officer made a further discussion based on certain judicial pronouncements as to the correct entity in whose hands such ‘deemed dividend’ is to be taxed, namely, whether in the hands of the recipient concern who is not a registered shareholder or in the hands of the registered shareholder. In that context, he considered that the judicial pronouncements envisaged the amount to be taxed in the hands of the shareholder as distinct from the recipient concern for which he observed that “separate proceedings shall be initiated to tax the ‘payment of loan’ as ‘deemed dividend’ in the hands of shareholder, considering abovementioned judgements u/s 163 of the Act by treating the assessee company as the ‘Representative assessee’ u/s 163 of the Act”. Ostensibly, the shareholder being referred to by the Assessing Officer in that case is the assessee-company before us. This assessment in the case of Portescap was finalised by the Assessing Officer on 21.12.2012. Thereafter, assessment in the case of Videojet was completed u/s 143(3) r.w.s. 144C(13) of the Act dated 27.02.2014 wherein also the applicability of Sec. 2(22)(e) of the Act to the sum of Rs.13 crores received from Portescap has been addressed. In the said assessment, the Assessing Officer dealt with the defence of the assessee before him (i.e. Videojet) that if at all Sec. 2(22)(e) of the Act was attracted, the sum was liable to be taxed in the hands of the concerned shareholder and that Videojet was not a shareholder of Portescap. Inspite of the above, the Assessing Officer went ahead and assessed the amount of Rs. 13 crores as ‘deemed dividend’ within the meaning of Sec. 2(22)(e) of the Act in the hands of Videojet on a substantive basis.

14. In this background, now we have to consider the formation of belief about escapement of income qua the aforesaid amount in the hands of the assessee-company on the date of recording reasons, i.e. 18.07.2014. Quite clearly, on the date of recording reasons, assessment of Rs. 13 crores as ‘deemed dividend’ in terms of Sec. 2(22)(e) of the Act stood finalised on substantive basis in the hands of Videojet and, of course, on protective basis too, in the hands of Portescap. The reasons recorded also bring out that they were based on the information provided by the DCIT-8(2), Mumbai vide communication dated 03.07.2013, who was the assessing authority for Portescap. The moot question is when the same income purported to be taxable u/s 2(22)(e) of the Act is already lying taxed, can it be said that it constituted an escapement of income so as to be the basis for Assessing Officer in the instant case to initiate proceedings under Sections 147/148 of the Act. Ostensibly, the reasons for reassessment should not only have a rational nexus but also an intelligible nexus to form a belief that certain income had escaped assessment. In the factual matrix which is prevalent in the instant case, it could not be said that the said income had escaped assessment inasmuch the same was already subjected to assessment on a substantive as well as on protective basis in the hands of other two entities. We may again hasten to add here that we are not on the correctness of assessing the impugned amount in the hands of assessee u/s 2(22)(e) of the Act, but merely examining the validity of the assumption of jurisdiction u/s 147 of the Act, which has to be adjudicated having regard to the prescription of the said section. At the time of hearing, the learned representative also made a reference to the decision of the Bangalore Bench of the Tribunal in the case of DCIT vs Bullion Investments & Financial Services (P.) Ltd., [2010] 123 ITD 568 (Bang.) wherein also a somewhat similar situation has been dealt with. In the case before the Bangalore Bench, proceeding under Sections 147/148 of the Act was initiated in the case of a company in order to tax an income which had already been subjected to assessment in the hands of another company. As per our co-ordinate Bench, such initiation was impermissible as once the Revenue takes a stand that an income is assessable in the hands of an assessee and passes an assessment order, then it could not be said that same income had escaped assessment in the hands of another assessee. In our considered opinion, the meaning of expression “escaped assessment” appearing in Sec. 147 of the Act is quite clear and does not entail any ambiguity inasmuch as it cannot cover within its fold an income which has already been taxed. Quite clearly, in the instant case, not only the income taxed in other hand is same, but it has also been assessed in the other hand by invoking the very same section which is sought to be invoked in the present case, namely, Sec. 2(22)(e) of the Act. Therefore, considering the entirety of facts and circumstances, we are unable to uphold that there was any rational or intelligible nexus between the reasons and formation of belief by the Assessing Officer about the impugned escapement of income. Thus, on this aspect, we uphold the plea of the assessee that the initiation of proceedings under Sections 147/148 of the Act is untenable in the eyes of law and, consequently the assessment is liable to be quashed. We hold so.

15. Though in the earlier paras we have quashed the assessment, the rival parties have also made arguments on the merits of the addition made by the Assessing Officer and, therefore, in deference thereof, we also proceed to adjudicate the merits of the addition. On this aspect, the grievance of the assessee is articulated by way of Ground of appeal no. 2, whereby it is canvassed that the provisions of Sec. 2(22)(e) of the Act are inapplicable in the context of the amount of Rs.13,00,00,000/- advanced by Portescap to Videojet inasmuch as it is not in the nature of loan as sought to be characterized by the Assessing Officer. As per the appellant, the amount of Rs.13,00,00,000/- given by Portescap to Videojet is in the nature of an ICD as distinct from a loan. Pertinently, the aforesaid plea of the assessee is based on the proposition that the payment referred to in Sec. 2(22)(e) of the Act is “by way of advance or loan”. The learned representative for the assessee referred to the judgments of the Hon’ble Bombay High Court in the case of Durga Prasad Mandelia vs ROC, (1987) 61 Comp. Cas. 479 (Bombay HC) and Pennwalt India Ltd. vs ROC, (1987) 62 Comp. Cas. 112 (Bombay HC) to canvass that a loan and deposit are distinct transactions. Bringing out the key distinguishing factors, it has been pointed out that in the case of a deposit, the initiation is at the instance of the depositor, i.e. the giver who has surplus funds, as distinct from the case of a loan where the transaction is initiated at the instance of the borrower who is in need of the money. Secondly, in the case of a deposit, the amount is repayable on demand whereas a loan is repayable on the conclusion of the agreed tenure. In the case of a deposit, the depositor earns interest on surplus funds akin to fixed deposit placed with a bank whereas a loan is a transaction of advancing money on interest. To point-out that the aforesaid features exist in the transaction of Rs.13,00,00,000/- given by Portescap to Videojet, the learned representative referred to the Board Resolution of Portescap dated 23.06.2008 setting-out the terms of giving ICD to Videojet in terms of Sec. 292(1)(d) of the Companies Act, 1956. It is pointed out that Sec. 292(1)(d) of the Companies Act, 1956 deals with the power of the Board of Directors of a company to invest monies as distinct from the power to make loans, which is conferred by a different section, i.e. Sec. 292(1)(e) of the Companies Act, 1956. Secondly, it is pointed out that the existence of surplus funds with the depositor, i.e. Portescap is clearly noted in the Board Resolution dated 23.06.2008 and the same is also verifiable from the Audited Financial statements. In support of his proposition, reference has also been made to a copy of the ICD agreement, which is placed at pages 14 to 18 of the Paper Book, wherein clause (1) itself brings out that the transaction was initiated by Portescap, i.e. the depositor and not by Videojet. Secondly, clause (2) of the Deposit agreement has also been referred to, which defines the tenure of the deposit being two years from initial drawdown, which was extendable for one year, if agreed by both the parties. Thirdly, even clause (4) dealing with the ‘Return’ brings out that interest is payable by Videojet @ 3 months MIBOR + 0.5% prevailing on first working day of the applicable quarter. In this case, the depositor has sought interest at a specified rate from the acceptor of deposit, which therefore showed that the depositor has given the deposit for its benefit in the form of earning of interest. Clause (6) of the agreement has also been brought-out to show that the purpose of Videojet, the acceptor, to use the funds deposited has been identified, namely, to finance the activities of Videojet, in particular, for purchase of fixed assets, to improve its commercial distribution network and to meet other working capital requirements. The clause has been emphasised by the learned representative to say that the depositor, i.e. Portescap imposed this condition in order to safeguard its money. Even clause (5) relating to repayment and termination has been referred to say that there is no pre-determined repayment schedule set-out which usually exists in case of a Loan agreement. In the present case, the Principal amount is repayable by Videojet in unequated instalments over the tenure of the deposit depending on the cash generation from its operations. Clause (7) of the Deposit agreement has been referred to point out that it entitles the depositor, i.e. Portescap to ask for immediate repayment of the deposit in the event that the acceptor, i.e. Videojet becomes insolvent or will be unable to pay its deposits or if an order is made or a Petition is filed for liquidation or bankruptcy of the acceptor. It is pointed out that a Loan agreement is devoid of any such terms and conditions. Furthermore, reference has been invited to pages 78 to 80 of the Paper Book, wherein is placed a copy of the deposit receipt issued by the acceptor, i.e. Videojet, which also shows acceptance of an ICD from Portescap.

16. Apart from the aforesaid, the learned representative pointed out that Mumbai bench of the Tribunal in the case of Bombay Oil Industries Ltd. vs DCIT, [2009] 28 SOT 383 (Mum.) has examined the issue as to whether an ICD is distinct from a loan or advance, as understood for the purpose of Sec. 2(22)(e) of the Act, and it has been held that an ICD would not fall within the purview of ‘deemed dividend’ u/s 2(22)(e) of the Act. It is pointed out that a similar view has also been taken by the Mumbai bench of the Tribunal in the case of M/s. Subhkam Monetary Services Pvt. Ltd. in ITA Nos. 5902 & 6018/Mum/2009 dated 30.11.2011.

17. On the other hand, the ld. DR appearing for the Revenue has defended the action of the Assessing Officer. The ld. DR has referred to para 4.7 of the order of the DRP to say that in the present case there was nothing on the record to indicate that the nature of the amount given by Portescap to Videojet was of an ICD and not a loan. The ld.DR emphasised that the facts and circumstances of the case, as understood by the DRP, is to the effect that Videojet was in need of funds for its working capital requirements as specified in clause (6) of the Deposit agreement and since Portescap had surplus funds, the amount was loaned to Videojet and thus it could be said that this lending to Videojet was at the instance of the assessee, who was a common shareholder. According to the ld. DR, it can also be understood as a case of advancing money by Portescap to meet the requirement of Videojet, which would thus justify the conclusion of the Assessing Officer that it is a case of a loan received by Videojet from Portescap. The ld. DR emphasised that both Portescap and Videojet are controlled by the same entity, i.e. the instant assessee, and that in the absence of any conclusive evidence to show that the money was advanced at the instance of Portescap or it was given at the request of Videojet, the only conclusion that is liable to be drawn is that it is a case of a ‘loan’ and, therefore, the Assessing Officer was justified in invoking Sec.2(22)(e) of the Act.

18. We have carefully considered the rival submissions. Ostensibly, Sec. 2(22)(e) of the Act creates a deeming fiction in terms of which an amount paid otherwise than as a dividend is brought into the tax net as ‘dividend’, subject of course, to the fulfilment of other conditions prescribed therein. The Hon’ble Supreme Court in the case of Gopal and Sons (HUF) vs CIT, 391 ITR 1 (SC) noticed the aforesaid feature of Sec. 2(22)(e) of the Act and laid down that it is to be given a strict interpretation. In other words, as per the Hon’ble Supreme Court, since the provision extends the definition of ‘dividend’ on an artificial basis, strict interpretation is to be given in order to bring any amount into its fold. Thus, what can be safely deduced at the present is that unless a particular sum fulfils all the stated conditions of Sec. 2(22)(e) of the Act, the same cannot be brought to tax as a ‘deemed dividend’. It is in this manner that one has to appreciate the stand of the assessee that the payments sought to be covered in Sec. 2(22)(e) of the Act are only those which fall within the meaning of the expression “advance or loan”. The distinction that is sought to be made out before us is that the transaction in question is in the nature of an ICD, which is quite distinct from a ‘loan or advance’ and, therefore, it would be outside the purview of Sec. 2(22)(e) of the Act. The distinction between an ICD and a loan has been eloquently brought out by the Hon’ble Jurisdictional High Court in the cases of Durga Prasad Mandelia (supra) as well as Pennwalt India Ltd. (supra) and the same does not require any further elaboration from our side. So however, we may refer to the decision of the Special Bench of the Tribunal in the case of Gujarat Gas Financial Services Ltd. vs ACIT, [2008] 115 ITD 218 (AHD.)(SB) wherein even in the context of Interest Act, 1974, the distinction between an ICD and a loan has been accepted. The aforesaid reasoning prevailed with our co-ordinate Bench in the case of Bombay Oil Industries Ltd. (supra) to say that an ICD is quite different from a ‘loan or advance’ contemplated u/s 2(22)(e) of the Act. Therefore, it was held that an ICD could not be treated as a ‘deemed dividend’ within the meaning of Sec. 2(22)(e) of the Act. Before us, the Revenue has not brought out any judicial ruling to the contrary, and in fact, the discussion in the order of the DRP also shows that it impliedly accepted such proposition in principle. In fact, reference by the DRP to the judgment of the Hon’ble Madhya Pradesh High Court in the case of Sharda Talkies (Firm) vs Smt. Madhulata Vyas, AIR 1966 NMP 68 in para 4.8 of its order shows its concurrence with the concept of a distinction between a deposit and a loan. Thus, on the aspect of an ICD being distinct from a loan for the purpose of Sec. 2(22)(e) of the Act, we do not deal any further. So, however, the case made out by the Revenue before us is that having regard to the material on record, it does not justify the assertion of the assessee that the instant is a case of giving of ICD by Portescap to Videojet and not a loan.

19. In this context, we find that the DRP has referred to clause (6) of the Deposit agreement in order to say that it was the recipient, i.e. Videojet which was in need of funds and, therefore, it has to be understood as a loan transaction and not a deposit of money by Portescap for interest.

20. Before we decide this aspect of the controversy, we deem it fit and proper to refer to certain clauses of the Deposit agreement which would bring out the salient features of the transaction as understood by both the parties, i.e. Portescap and Videojet. The relevant clauses are :-

“1. Deposit

The Depositor will lend to the Acceptor a deposits of an amount upto Rs.15,00,00,000/- (Indian Rupees Fifteen Crores only) under the provisions as set forth hereinafter.

2. Deposits Term

The term of the deposits is two years from initial drawdown, which can be further extended for one year if agreed by both parties.

4. Interest

The Acceptor shall pay interest on outstanding deposit as per the below terms on quarterly basis

Interest shall be paid at the rate of three months MIBOR + 0.5% prevailing on the first working date of applicable quarter.

Interest shall be payable at the end of the quarter on reducing balance through account payee cheque or by electronic fund transfer (EFT) subject to TDS as per Income Tax Act, as applicable.

5. Repayments

The Acceptor will repay the principal amount in un-equated instalments over the tenure of the Deposit, depending on cash generation from its operation.

6. Purpose

The funds borrowed under this Deposits Agreement are to be used by the Acceptor to finance the activities of the Acceptor, in particular, for purchase of fixed assets, improve its commercial distribution network and to meet with the working capital requirements.

7. Termination

Notwithstanding the foregoing provisions, the Deposit shall be entitled to ask for immediate repayment of the deposit in the event that the Acceptor will become insolvent or will be unable to pay its deposit, or if an order is made or a petition filed for the liquidation or for the bankruptcy of the Acceptor.”

21. In the above background, we may now touch upon the features of the arrangement which have a bearing on the question as to whether it was in the nature of a deposit or a loan. Ostensibly, so far as the decision making for advancing of money is concerned, a useful insight is obtained on account of the Board Resolution of Portescap dated 23.06.2008, which notes the availability of surplus funds not immediately required by it. It further talks of the possibility of best utilisation of surplus funds by deploying with Videojet, and in that context, it has been resolved pursuant to Sec. 292(1)(d) of the Companies Act, 1956 to place an ICD with Videojet. The receipt issued by Videojet to Portescap for receipt of money also terms it as a ‘deposit’ by Portescap. The fact that Portescap had surplus funds has been consistently canvassed by the assessee before the lower authorities, which has not been contested. In fact, the same is also borne out of the Financial statements of Portescap, a copy of which has been placed in the Paper Book at pages 18 to 50. The amount has been depicted in the Balance-sheet of Portescap also as Inter-Corporate Deposit and so is the position in the Balance-sheet of the recipient, i.e. Videojet. Now, clause (6) of the Deposit agreement says that the funds borrowed in terms of the agreement are to be used by Videojet to finance its activities, in particular, for purchase of fixed assets, improving its commercial distribution network and for meeting its working capital requirements. This has been interpreted by the Revenue to say that Videojet was in need of funds and, therefore, the money was lent by Portescap, thus rendering it to be in the nature of a loan. In our considered opinion, the said approach of the Revenue is not justified because one of the clauses of the agreement cannot be read de hors the other clauses so as to infer the nature of the transaction. In fact, the DRP in para 4.8 of its order referred to the judgment of the Hon’ble Madhya Pradesh High Court in the case of Sharda Talkies (Firm) (supra) and has reproduced its extract, which brings out that “what should be regarded is the cumulative effect of the evidence which bears on the character of the debt as a loan or a deposit”. We are referring to the aforesaid proposition for the fact that if the purpose of utilisation of the funds in clause (6) was the sole guide to treat it as a ‘loan’, then clause (7), which deals with the termination of the agreement, clearly brings out to the contrary. In fact, clause (7) brings out that the depositor, i.e. Portescap shall be entitled to ask for immediate repayment of the deposit in certain situations. This kind of a clause would be conspicuous by its absence in the case of a loan. In fact, to say that because of clause (6) it was to be inferred that it is Videojet who required the funds and, therefore, it raised the loan is not justified because stating of purpose or utilisation of funds cannot be compared to the requirement or need to raise funds as a ‘loan’. If the situation as understood by the Revenue was to be true, that the loan was raised by Videojet for its requirement, then, it would not have agreed to clause (7) of the Deposit agreement enabling the giver of funds to call for its immediate repayment. Similarly, if it was to be in the nature of a ‘loan’ raised by Videojet, clause (5) of the Deposit agreement would militate against such an inference because clause (5) dealing with repayment is quite open-ended. Clause (5) of the Deposit agreement prescribes that Videojet shall repay the principal amount in unequated instalments over the tenure of the deposit depending on the cash generation from its operations. As we have seen earlier, one of the principal distinction between a ‘loan’ and ‘deposit’ is the term of repayment. In the case of a ‘deposit’, the sum is repayable on demand, whereas a ‘loan’ is repayable on completion of the agreed tenure. In this context, if one is to see the contents of clause (5) of the Deposit agreement dealing with repayment, it could not be said that it is a case of raising of ‘loan’.

22. Apart from the aforesaid, it is abundantly clear that the two parties to the transaction, i.e. Portescap (giver of money) and Videojet (recipient of money) have transacted considering the transaction to be one of an ICD. It is also a fact that the Deposit agreement has fructified inasmuch as the parties have acted upon it. Under these circumstances, and considering the features of the Deposit agreement, which we have discussed above, in our view, the cumulative effect of the evidence which bears on the character of the transaction demonstrates that it is in the form of a ‘deposit’ and not as a ‘loan’. Therefore, in our considered opinion, the Revenue is wrong in asserting that it was a case of ‘loan’ so as to fall within the purview of Sec. 2(22)(e) of the Act. Thus, we conclude by holding that the sum of Rs.13,00,00,000/- given by Portescap to Videojet would not fall within the scope and ambit of Sec. 2(22)(e) of the Act and, therefore, the addition made is directed to be deleted.

23. The other aspect in the appeal is by way of Ground of appeal no. 3 wherein the rate of tax has been agitated. This aspect of the controversy is linked to the plea of the assessee raised in the Additional Ground of appeal, as our subsequent discussion would show. Therefore, we may first take up the Additional Ground of appeal preferred by the assessee.

24. By way of Additional Ground of appeal it is contested that the impugned sum is also not taxable under the India-Mauritius Tax Treaty. The Additional Ground so raised, does involve a point of law and the relevant facts being available on record, the same is admitted for adjudication following the principles laid down in the case of National Thermal Power Co. Ltd. vs CIT, 229 ITR 383 (SC). This was put across to the parties and, therefore, both the counsels made their respective submissions on merits.

25. As per the assessee, it is a tax resident of Mauritius and the DRP in its order dated 23.12.2016 held that ‘deemed dividend’ in question is not covered within the meaning of the expression “dividend” used in Article 10(4) of the India-Mauritius Tax Treaty. The learned representative pointed out that in Assessment Year 2010-11 also, the CIT(A) went by the stand of the DRP dated 23.12.2016 and took the view that the ‘deemed dividend’ was not covered within the definition of ‘dividend’ under Article 10(4) of the India-Mauritius Tax Treaty. Therefore, it is sought to be pointed out that once ‘deemed dividend’ is not understood as ‘dividend’ in the India-Mauritius Tax Treaty, its taxability in India would be governed by the residuary article of the Tax Treaty, namely, Article 22 dealing with ‘other income’; and, extending the argument further it is canvassed that since assessee does not have a Permanent Establishment (PE) or a fixed base in India, Article 22(1) would come into operation and such income by way of ‘deemed dividend’, wherever arising, can only be taxed in the State of residence of the assessee, i.e. Mauritius, and not in India. Thus, it is canvassed that assessee being a resident of Mauritius, it is covered by Article 22(1) of the India-Mauritius Tax Treaty and such ‘deemed dividend’ is not taxable in India.

26. We have considered the aforesaid plea of the assessee, but do not find it acceptable. The India-Mauritius Tax Treaty prescribes that dividend paid by a company which is resident of a contracting state to a resident of other contracting state may be taxed in that other state. Article 10(4) of the Treaty explains the term “dividend” as used in the Article. Essentially, the expression ‘dividend’ seeks to cover three different facets of income; firstly, income from shares, i.e. dividend per se; secondly, income from other rights, not being debt claims, participating in profits; and, thirdly, income from corporate rights which is subjected to same taxation treatment as income from shares by the laws of contracting state of which the company making the distribution is a resident. In the context of the controversy before us, i.e. ‘deemed dividend’ under Section 2(22)(e) of the Act, obviously the same is not covered by the first two facets of the expression ‘dividend’ in Article 10(4) of the Treaty. So, however, the third facet stated in Article 10(4) of the Treaty, in our view, clearly suggests that even ‘deemed dividend’ as per Sec. 2(22)(e) of the Act is to be understood to be a ‘dividend’ for the purpose of the Treaty. The presence of the expression “same taxation treatment as income from shares” in the country of distributor of dividend in Article 10(4) of the Treaty in the context of the third facet clearly leads to the inference that so long as the Indian tax laws consider ‘deemed dividend’ also as ‘dividend’, then the same is also to be understood as ‘dividend’ for the purpose of the Treaty. Therefore, for the said reason, we are unable to accept the plea of the assessee contained in the Additional Ground of appeal. Thus, on this aspect, assessee has to fail.

27. Now, we may come back to Ground of appeal no. 3, wherein the controversy is the rate of tax applied by the income-tax authorities. In this context, the Assessing Officer has taxed the dividend at 42.23% on gross basis. As per the assessee, it was to be taxed @ 5% in terms of Article 10 of India-Mauritius Tax Treaty. The stand of the Assessing Officer is based on the decision of the DRP that ‘dividend income’ as per Sec. 2(22)(e) of the Act is not dividend as understood for the purposes of India-Mauritius Tax Treaty.

28. In this context, in the earlier paras we have already held that it is wrong to say that ‘deemed dividend’ in question is not be understood as ‘dividend’ for the purposes of India-Mauritius Tax Treaty. Once it is held that the impugned deemed dividend is also of the nature of dividend for the purposes of India-Mauritius Tax Treaty, we find that the applicable rate of tax is 5% as correctly canvassed by assessee. Thus, in conclusion, we uphold the stand of assessee that the applicable tax rate on the dividend income is in terms of the India-Mauritius Tax Treaty. Thus, assessee succeeds on this aspect.

29. In the result, appeal of the assessee for Assessment Year 2009-10 is allowed, as above.

30.Now, we may take-up the appeal of assessee pertaining to Assessment Year 2010-11 wherein also a similar dispute is involved. The Grounds of appeal raised by the assessee in this appeal read as under :-

“Ground 1 – Re-opening is bad in law

1.1 In the facts and circumstances of the case, the notice under Section 148 of the Act is without jurisdiction and/or in excess of jurisdiction, erroneous, void and otherwise bad in law.

1.2 In the facts and circumstances of the case and in law, the Assessing Officer (AO) erred in reopening the assessment under Section 147 read with Section 143(3) of the Act and the Commissioner of Income-tax (Appeals) [CIT(A)] erred in confirming the same.

Ground 2 – Inter Corporate Deposit of Rs.92,00,00,000 erroneously treated as Loan and taxed as dividend under Section 2(22)(e) of the Act

2.1 On the facts and circumstances of the case and in law, the AO erred in concluding and the CIT(A) in confirming the taxation of ICDs of Rs.92,00,00,000 as dividend income of the Appellant under Section 2(22)(e) of the Act.

2.2 The AO and the CIT(A) failed to appreciate the distinction between ICDs and Loans.

2.3 The Appellant prays that re-characterizing the ICDs as Loan and taxing it is as dividend under Section 2(22)(e) of the Act is erroneous, unwarranted and be deleted.

Ground 3 – ICDs of Rs.90,00,00,000 cannot be taxed as dividend under Section 2(22)(e) of the act as the Appellant was not a shareholder of Recipient Indian Company

3.1 On the facts and circumstances of the case and in law, the AO erred concluding and the CIT(A) in confirming the taxation of ICDs of Rs.90.00,00,000 placed by Appellant’s Wholly Owned Subsidiary in India with the Recipient Indian Company as dividend under Section 2(22)(e) of the Act as the Appellant was not the shareholder of the Recipient Indian Company when the deposits were placed.

Ground 4 – Invoking third limb of Section 2(22)(e) of the Act/ enhancement of assessment invalid

4.1 The CIT(A) erred in enhancing the assessment without giving reasonable opportunity of showing cause against the assessment as required under Section 251(2) of the Act.

4.2 The CIT(A) further erred in invoking third limb of Section 2(22)(e) of the Act.

4.3 The CIT(A) erred in not providing any opportunity to the Appellant and not appreciating that the Appellant has not derived any benefit out of the transaction and she further failed establish any tangible benefit being derived by the Appellant.

4.4 The Appellant prays that treating the ICDs of Rs.90,00,00,000 as dividend under Section 2(22)(e) of the Act is erroneous, unwarranted and be deleted.

Ground 5 – Rectification of error in the rate of tax applied on alleged dividend income

5.1 Without prejudice, on the facts and circumstances of the case and in law, the AO erred in computing and the CIT(A) in confirming the tax on alleged dividend of Rs.92,00,00,000 at 21.115% on gross basis as against 5% on gross basis under Article 10 of India-Mauritius Tax Treaty (‘Tax Treaty’) as adopted in the assessment order.”

31. In this year, the relevant facts are that Portescap had advanced monies totalling to Rs.90,00,00,000/- to one, M/s. Gilbarco Veeder Root (India) Pvt. Ltd. (hereinafter referred to as ‘GVR’) and Rs.2,00,00,000/- to one, M/s. DHR Holding India Pvt. Ltd. (hereinafter referred to as ‘DHR’). The assessee-company, as we have noted earlier, directly holds almost 99.99% of the shares of Portescap. In GVR as well as DHR, assessee holds 100% of the shares and in this manner, noticing the common shareholding of the assessee in the aforestated three concerns, the Assessing Officer examined the applicability of Sec. 2(22)(e) of the Act qua the amount of Rs.92,00,00,000/- advanced by Portescap to GVR and DHR. As per the Assessing Officer, the amount of Rs.92,00,00,000/- advanced by Portescap to GVR and DHR fell within the purview of Sec. 2(22)(e) of the Act, and the assessee-company being a common shareholder, the said sum was treated as ‘deemed dividend’ u/s 2(22)(e) of the Act in the hands of the assessee-company. Notably, insofar as the amount of Rs.90,00,00,000/- advanced to GVR is concerned, the Assessing Officer has taxed it in the hands of assessee on a protective basis noticing that in the case of GVR, such amount has been assessed on substantive basis by invoking Sec. 2(22)(e) of the Act vide assessment order passed u/s 143(3) r.w.s. 148 of the Act dated 29.02.2016 for Assessment Year 2010-11. Insofar as amount of Rs.2,00,00,000/-advanced to DHR is concerned, the same has been assessed on a substantive basis in the hands of the assessee itself by invoking Sec. 2(22)(e) of the Act.

32. Insofar as the amount advanced to GVR is concerned, a pertinent plea of the assessee is that the same was advanced by Portescap in three tranches, i.e. Rs. 24 crores on 29.10.2009, Rs.26 crores on 02.03.2010 and Rs.40 crores on 03.03.2010. It has been pointed out that on the aforestated three dates, assessee-company was not holding any shares in GVR and that it is only for the first time on 17.03.2010, assessee acquired shareholding of GVR. It was, therefore, contended that even if the monies given by Portescap to GVR are treated as loans or advances for the purpose of Sec. 2(22)(e) of the Act, yet it could not be taxed as ‘deemed dividend’ in the hands of the assessee as assessee was not a substantial shareholder of GVR on the relevant dates, i.e. 29.10.2009, 02.03.2010 and 03.03.2010 when the monies were given to GVR. We find that this aspect of the controversy was brought out by the assessee before the Assessing Officer as well as before the CIT(A). On this aspect, the Assessing Officer has not made any averment, so however, the CIT(A) has not agreed with the assessee. As per the CIT(A), shares of GVR were acquired by assessee on 17.03.2010 from Videojet and even on the three dates when monies were advanced by Portescap to GVR, assessee was holding the entire shares of Videojet, which in turn was holding 100% of the shares of GVR, which made GVR a step-down subsidiary of the assessee-company. As per the CIT(A), since assessee was having 100% shareholding of Videojet, which in turn had 100% shareholding of GVR, it would make assessee a beneficial shareholder of GVR, thus attracting the deeming provisions of Sec. 2(22)(e) of the Act in the hands of the assessee-company. The CIT(A) justified the taxation of the impugned sum u/s 2(22)(e) of the Act also on account of third limb of Sec. 2(22)(e) of the Act whereby any payment made for the benefit of the shareholder (being either a registered and a beneficial shareholder), would result in addition u/s 2(22)(e) of the Act in the hands of the assessee-company.

33. Before us, the learned representative for the assessee relied upon the judgment of the Hon’ble Allahabad High Court in the case of CIT vs H.K. Mittal, 219 ITR 420 (All) to contend that on the relevant date when the amounts have been advanced, the relationship of shareholder must exist. Reliance has also been placed on the judgment of the Hon’ble Kerala High Court in the case of CIT vs Smt. S. Parvathavarthini Ammal, 219 ITR 661 (Kerala). The judgment of Hon’ble Punjab & Haryana High Court in the case of CIT vs Paramjit Singh, [2015] 231 Taxman 450 has also been relied upon in support.

34. On the other hand, the ld. DR appearing for the Revenue has referred to para 5.2 of the order of CIT(A) on this aspect, which we have already noticed in the earlier paras and is not being repeated for the sake of brevity.

35. A perusal of Sec. 2(22)(e) of the Act would reveal that three types of payments are covered within its fold which are deemed to be understood as ‘dividend’. The three categories are namely (i) any payment by way of advance or loan to a shareholder; (ii) any payment on behalf of a shareholder; and, (iii) any payment for the individual benefit of a shareholder. In the present case, qua the payment of Rs.90,00,00,000/-made by Portescap to GVR, the Assessing Officer invoked Sec. 2(22)(e) of the Act considering that assessee was a common shareholder owning substantial shareholding in Portescap as well as GVR. The implication is that the Assessing Officer invoked the second limb of Sec. 2(22)(e) of the Act, namely that the payment by Portescap to GVR was on behalf of the common shareholder, i.e. the assessee. Quite clearly, the stand is not tenable because, factually speaking, on the dates when the monies have been given by Portescap to GVR, assessee was not holding any shares in GVR. Therefore, in such a situation, the judgment of the Hon’ble Allahabad High Court in the case of H.K. Mittal (supra) clearly militates against the Revenue because the relevant date to examine the shareholding pattern is the date on which the amount has been advanced. Insofar as the CIT(A) is concerned, he affirmed the approach adopted by the Assessing Officer by noticing that even prior to assessee becoming the shareholder of GVR, assessee was holding 100% shares of Videojet, who in turn was holding 100% shares of GVR and, therefore, at the relevant point of time when the impugned sums were given by Portescap to GVR, assessee was a beneficial shareholder in GVR. In our considered opinion, the conditions prescribed in Sec. 2(22)(e) of the Act in order to treat an amount as ‘deemed dividend’ are to be strictly interpreted and in that light the approach of the CIT(A) is quite untenable. Apart from making a bland assertion, the CIT(A) does not justify as to how assessee became a beneficial shareholder of GVR inspite of it not having any direct shareholding on the relevant dates, but by simply holding shares of its subsidiary, Videojet. Further, the CIT(A) invoked the third limb of Sec. 2(22)(e) of the Act whereby a payment made for the benefit of a shareholder is also regarded as ‘dividend’ within the meaning of Sec. 2(22)(e) of the Act. In this context, we find that neither in the assessment order nor in the order of CIT(A) there is any material to point out that the payment in question made by Portescap to GVR was for the individual benefit of any shareholder of Portescap; and, in any case it cannot be straightaway inferred that the payments made on 29.10.2009, 02.03.2010 and 03.03.2010 to GVR were for the individual benefit of the assessee considering that assessee was not even a shareholder of Portescap on the aforesaid dates. Thus, there is no justification for the CIT(A) to invoke the third limb of Sec. 2(22)(e) of the Act in the present situation. Thus, on this aspect, so far as the inclusion of Rs.90,00,00,000/- paid by Portescap to GVR within the scope of Sec. 2(22)(e) of the Act is concerned, the same is quite untenable. We hold so.

36. Further, in this year, though the basic plea of the assessee is that the amounts of Rs.90,00,00,000/- given to GVR and Rs.2,00,00,000/- given to DHR by Portescap is an ICD and, therefore, is not in the nature of a ‘loan’ or ‘deposit’ to be covered under Sec. 2(22)(e) of the Act, however, the said plea is supported merely by a Board Resolution of Portescap and there are no Deposit agreements as was the situation dealt with by us in Assessment Year 2009-10 in the earlier paras. In the absence of any Deposit agreement or any other bilateral agreement, which would bring out the terms and conditions and the features of the transaction as understood by the parties, it would not be appropriate to say that it is in the nature of an ICD and not a loan. Therefore, the aforesaid plea of the assessee, though accepted in Assessment Year 2009-10 by us in the earlier paras, has to fail in this assessment year on account of the failure of the appellant to lead appropriate evidence.

37. Now, the only other aspect left is with regard to a sum of Rs.2,00,00,000/- given by Portescap to DHR. The said amount is liable to be treated as a loan or advance, as held by us in the earlier para and, therefore, the same has been rightly treated to be falling within the scope of Sec. 2(22)(e) of the Act by the income-tax authorities, which we hereby affirm.

38. Before parting, we may note that in this assessment year also, assessee had raised Ground challenging the initiation of proceedings by the Assessing Officer by issue of notice under Section 148 of the Act. On this aspect, the learned representative for the assessee had made submissions regarding the discrepancy in obtaining approval from the competent authority under Section 151 of the Act. Notably, in this context, the ld. DR had filed the relevant copies of the proposal of reopening initiated by the Assessing Officer as also the requisite approval by the competent authority in terms of Sec. 151 of the Act. We do not find any infirmity in the same and, therefore, the objection of the assessee on the initiation of proceedings under Sections 147/148 of the Act is liable to be dismissed. We hold so.

39. In conclusion, so far as Assessment Year 2010-11 is concerned, the Assessing Officer is directed to recompute the total income considering the sum of Rs.2,00,00,000/-as falling within the meaning of ‘deemed dividend’ as per Sec. 2(22)(e) of the Act and determine the tax liability applying the tax as indicated by us earlier in para 28, as per law.

40. In the result, whereas the appeal of the assessee for Assessment Year 2009-10 is allowed, that for Assessment Year 2010-11 is partly allowed, as above.

Order pronounced in the open court on 6th November, 2018.

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