s regard to deemed dividend under Section 2(22) (e) of 1961 Act, we, at the outset, observe that the issue as to applicability of said provision to a non-member/non-shareholder of the concerned company which has given the loan/advance has been settled by the decision in “CIT Vs. M/s Ankitech Pvt. Ltd and others [340 ITR 14 (Del)] (ITR 462/2009)” wherein Division Bench of High Court of Delhi held that Where assessee was not a member/shareholder of the concerned company, therefore, loan/advance received from such company was not deemed dividend under section 2(22)(e).
FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT
Shri D.P.S. Bhadoriya, learned counsel for the appellant.
With the consent of learned counsel for the parties, the matter is finally heard.
This appeal under Section 260-A of Income Tax Act, 1961 (for brevity “1961 Act”), is directed against the order dated 16.11.2017 passed by Income Tax Appellate Tribunal, Agra Bench, Agra in I.T.A.No.327/Agra/14.
Relevant facts giving rise to the controversy briefly are that in respect of assessment year 2010-2011, the respondent assessee was found having received amounts/loans and has paid various amounts to Tanushka Automobiles Pvt. Ltd and M/s Vinayaka Farms and Resorts (India) Pvt. Ltd., during assessment year 2010-2011. The assessee in his return filed on 4.9.2010 declared his total income of Rs.5,91,17,150/-. The case was selected for scrutiny. After notice under Section 142 of 1961 Act, a questionnaire was issued on 22.11.2012. During the course of assessment proceedings the assessment officer noticed that the assessee received various amounts from and paid various amounts to Tanushka Automobiles Pvt. Ltd. The Assessing Officer treated such loans/advance amount of Rs.3,69,12,500/-and Rs.10,00,000/- from M/s Vinayaka Farms & Resorts Pvt. Ltd. as deemed dividend as per section section 2 (22) (e) of the 1961 Act in the hands of the assessee. The assessing officer also made addition on account of income from house property as per the provisions of Section 22 read with Section 23 of 1961 Act. The assessee has shown income from house property of Rs.13,65,784/-. The assessing officer after calculating the fair value of the property held by the assessee at Rs.76,60,800/- (Rs.19,15,200/- letting out the property to Axis Bank and amount Rs.57,45,600/- for letting out the part of property to Tanushka Automobiles Pvt. Ltd.) as per the provisions of section 23 (1) (a) of the Act instead of Rs.20,35,200/- shown by the assessee. After deduction the house tax and deduction under section 24 (a) of the 1961 Act the income from house property was assessed at Rs.57,78,480/- which resulted in total addition of Rs.39,12,696/- on account of income from house property. The assessing officer also made a further addition on the interest Rs.13,75,355/- to its related concern i.e. Tanushka Automobiles Pvt. Ltd. under section 40A (2) (b) of 1961 Act.
In total three additions amounting to Rs.10,23,56,700/- was made to the income of the assessee against the return income of Rs.5,91,17,150/-. In appeal preferred by the assessee the addition by the assessment officer was deleted by the Commissioner, Income Tax (Appeal) by its order dated 12.8.2014.
In Second Appeal ITA 327/Agra/2014 Accounting Year 2010-2011, the Income Tax Appellate Tribunal upheld the deletion.
As regard to deemed dividend under Section 2(22) (e) of 1961 Act, we, at the outset, observe that the issue as to applicability of said provision to a non-member/non-shareholder of the concerned company which has given the loan/advance has been settled by the decision in “CIT Vs. M/s Ankitech Pvt. Ltd and others [340 ITR 14 (Del)] (ITR 462/2009)” wherein Division Bench of High Court of Delhi held:
“24. The intention behind enacting provisions of Section 2(22)(e) is that closely-held companies (i.e. companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions, such payment by the company is treated as dividend. The intention behind the provisions of Section 2(22)(e) of the Act is to tax dividend in the hands of shareholders. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance.
25. Further, it is an admitted case that under normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under Section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to “dividend”. Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to “shareholder”. When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under Section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non-members. The second category specified under Section 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the legislature was to tax such loan or advance as deemed dividend at the hands of “deeming shareholder”, then the legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsel for the Revenue would stand answered, once we look into the matter from this perspective.
26. In a case like this, the recipient would be a shareholder by way of deeming provision. It is not correct on the part of the Revenue to argue that if this position is taken, then the income “is not taxed at the hands of the recipient”. Such an argument based on the scheme of the Act as projected by the learned counsel for the Revenue on the basis of Sections 4, 5, 8, 14 and 56 of the Act would be of no avail. Simple answer to this argument is that such loan or advance, in the first place, is not an income. Such a loan or advance has to be returned by the recipient to the company, which has given the loan or advance.
27. Precisely, for this very reason, the Courts have held that if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend under Section 2(22)(e) of the Act.
28. Insofar as reliance upon Circular No. 495 dated 22nd, 1987 issued by CBDT is concerned, we are inclined to agree with the observations of the Mumbai Bench decision in Bhaumik Colour (P) Ltd. (supra) that such observations are not binding on the Courts. Once it is found that such loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not a shareholder, and that according to us is the correct legal position, such a circular would be of no avail.
29. No doubt, the legal fiction/deemed provision created by the legislature has to be taken to ‘logical conclusion’ as held in Andaleeb Sehgal (supra). The Revenue wants the deeming provision to be extended which is illogical and attempt is to create a real legal fiction, which is not created by the Legislature. We say at the cost of repetition that the definition of shareholder is not enlarged by any fiction.
32. We, thus, answer the questions in favour of the assessee and against the Revenue, as a result, these appeals are dismissed.”
The decision in M/s Ankitech Pvt. Ltd. (supra) has been affirmed by the Supreme Court in CIT Delhi II Vs. Madhur Housing and Development Company (Civil Appeal No.3961/2013 decided on 05/10/2017) in the following terms:
“The impugned judgment and order dated 11.05.2011 has relied upon a judgment of the same date by a Division Bench of the High Court of Delhi in ITA No.462 of 2009. Having perused the judgment and having heard arguments, we are of the view that the judgment is a detailed judgment going into Section 2(22)(e) of the Income Tax Act which arises at the correct construction of the said section. We do not wish to add anything to the judgment except to say that we agree therewith.”
In view whereof, we do not perceive any illegality in the findings arrived by the Commissioner, Income Tax (Appeals) and affirmed by the Tribunal that the assessee being not a member/shareholder of the concerned company the loan/advance received from such company is not deemed dividend u/s 2(22)(e) of the Act of 1961.
As regard to addition of Rs.39,12,696/- made by the Assessing Officer and deletion by the CIT (Appeals). The Appellate Authority in its findings has observed:
“7.3 I have gone through the various arguments of the AR and the written submissions given before me. The fact remains that the rent was received from Axis Bank at a much higher rate but also there is another fact that Tanuksha Automobiles Pvt Ltd had totally different terms and conditions of rental agreement. They were older tenant and the space given to Axis Bank was the prime space of the property. Further the appellant had taken a security deposit of Rs 2 cr. from Tanushka Automobiles Pvt Ltd as against no security deposit received from Axis Bank Ltd. Thus arrival of fair rental value on rent received from Tanushka Automobiles Pvt. Ltd. on the basis of rent received from Axis Bank Ltd. would not be a correct position as the terms and circumstances of both the tenants are different. In the various case laws cited by the appellate it has been held that if the appellant has received an actual rent in excess of municipal valuation then such a rent ought to be treated as fair rent in terms of section 23. Following the ratio laid down by the said decisions I find that the actual rent received by the appellant is in excess of fair rent as per the municipal valuation of similar date filed before me by the appellant. In view of the above there is no justification by the AO in making an addition of Rs Rs 39,12,696.00. Thus the addition of Rs 39,12,696/- made by the AO under section 23 is hereby deleted.”
The analysis is after appreciation of facts and has been affirmed by the Tribunal holding that the “reasonable rent” can only be the “standard rent” which is in syntax with the “municipal valuation” (for an authority please see Dewan Daulat Rai Kapoor Vs. NDMC, (1980)122 ITR 700 (SC); Mrs. Sheila Kaushish Vs. CIT (1981) 131 ITR 435 (SC) and Amolak Ram Khosla Vs. CIT (1981) 131 ITR 589 (SC). In view whereof, there being a concurrent findings of fact, we perceive no illegality as would give rise to a substantial question of law.
Similarly, as regard to deletion of Rs.13,75,355/-which was added by the Assessing Officer under Section 40A(2)(b) of the Act of 1961, the reasons which prevailed with the CIT (A) find mention in paragraph 8.2:
“8.2 The provisions of section 40A(2)(b) talk about the payments made to specified persons on rates more that fair market rates. As regards the payment of interest is concerned it depends on agreement between the two parties. The only issue arises that whether the rate of 6% paid by the appellant is in excess of the fair market rate. As per the AO the entire interest paid has to be disallowed. The AO has not doubted that fact that the appellant received a security deposit and an advance. The AO has also not doubted the fact that there was a formal agreement between both the parties to pay interest. The AO has also not doubted the fact that the interest provided/paid by the appellant to Tanushka Automobiles Pvt Ltd. was 6%. The AO has also not doubted and has allowed interest paid to other depositors @ 12% per annum by the appellant. Merely because no interest was paid on certain security deposit would not be the factor for determining the allowability of interest and applicability of provisions of section 40A(2)(b). The test thus would be whether the interest @ 6% paid by the appellant to Tanushka Automobiles Pvt Ltd was reasonable and fair as compared to the market rates. The AO has herself allowed interest paid to various depositors @ 12%. Further the rate at which the appellant has borrowed funds from the banks is still higher. The rate of 6% paid by the appellant to Tanushka Automobiles Pvt Ltd cannot be considered as higher at all. Further as regards contention of the AO that once the same is considered as deemed dividend the interest would not be allowed, it has been held by me above that the amount is not to be treated as deemed dividend. Furthermore, even if it would have been considered as the same the nature of amount received by the appellant from Tanushka Automobiles Pvt Ltd does not change. For the purposes of taxation a deeming fiction has been added but the nature of amount remains as loans and advance and thus even on this there is no question of disallowance. In view of the above discussions I hereby delete the disallowance of Rs.13,75,355/- made by the AO on account of interest paid by the appellant to Tanushka Automobiles Pvt Ltd.”
The Tribunal has affirmed the findings. Thus, unless established on facts that the payment for such expenditure was excessive or unreasonable having regard to fair market value, it cannot be disallowed. In the case at hand, no such facts are available, nor commended at. There being pure findings of fact, duly concurred, no substantial question of law arises for consideration.
Consequently, appeal fails and dismissed. No costs.