Sec. 2(22)(e) not applicable to inter banking transactions between group concerns

Neha Home Builders (P.) Ltd. Vs DCIT (ITAT Mumbai)

Conclusion: Since the transaction between assessee-company and other group concern were in the nature of current account and inter banking account containing both types of entries i.e., receipts and payments and assessee was neither the beneficial nor the registered shareholder of the company, therefore, the amount received from other group concern could not be brought in the purview of loans and advances so as to attract Section 2(22)(e).

Held: Assessee was a company engaged in the business of real estate construction – Builder & Developer. During the year, assessee (NHBPL) received a loan from EIPL which was repaid during the year. AO made addition u/s.2(22)(e) on the ground that EIPL was not lending concern and that voting Power of share holders in both the companies were more than 10% in both company (NHBPL & EIPL). Held: Since assessee was neither the beneficial nor the registered shareholder of the company, the amount so received was not liable to be taxed as deemed. Moreover, the transaction between two group concerns were in the nature of current account and inter banking account containing both types of entries i.e., receipts and payments, the same could not be brought in the purview of loans and advances so as to attract Section 2(22)(e).

FULL TEXT OF THE ITAT JUDGMENT

This is an appeal filed by assessee against the order of CIT(A)-21, Mumbai dated 06/03/2018 for A.Y.2013-14 in the matter of order passed u/s. 143(3) of the IT Act.

2. The following grounds have been taken by the assessee:-

1. The Ld CIT(A) erred in confirming and treating Rs. 10,82,10,904/- on account of Deemed Dividend under section 2(22)(e) of the Income Tax Act, 1961 and thereby erred in adding the same to the total income of the assessee.

2. The LD. CIT(A) failed to consider that:

a) Assessee received the amount from M/s Equator Investments Ltd. (EIPL) which is an investment, and advancing the amount is ordinary business of the EIPL, therefore, as per the clause (ii) of section 2(22)(e) amount received from EIPL do not fall under the definition of Dividend.

b) For applying the provision of section 2(22) (e) it is basic condition that assessee must be shareholder of the company from which amount is received. But, assessee is not a shareholder of EIPL. Therefore section 2(22) (e) cannot be applicable in the case of the assessee.

3. The Ld. CIT(A) erred in confirming the charging of interest under section 234B and 234C of the Income Tax Act 1961.

4. The Ld. CIT(A) erred in confirming the initiation of the penalty proceeding under section 27 l(l)(c) of the Income Tax Act 1961.

5. The Assessee craves leave to add further grounds or to amend or alter the existing grounds of appeal on or before the date of hearing.

3. Rival contentions have been heard and record perused.

4. Facts in brief are that assessee is a company engaged in the business of real estate construction – Builder & Developer. During the year assessee (NHBPL) received a Loan of RS.56.32 Crore from Equator Investment Pvt. Ltd. (EIPL) which was repaid during the year. Reserve and surplus of EIPL was Rs.10,82,10,904/-, therefore upto that amount AO made addition u/s.2(22)e. Plea of Department was that EIPL is not lending concern and that voting Power of Paras Gundecha and Poonam Gundecha (share holders in both the companies) are more than 10% in both company (NHBPL & EIPL). Therefore, section 2(22)(e) applies in hand of AOfurther observed that identical issue pending before Supreme Court in case of Impact Containers P Ltd.

5. By the impugned order, CIT(A) had confirmed the order of AO against which assessee is in further appeal before us. We have considered rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us. For clearly understanding as to whether provisions of Section 2(22)(e) is applicable, we hereunder reproduce relevant provisions:-

Section 2(22) (e) in the Income- Tax Act, 1961

“(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 the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for- the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; but” dividend” does not include-{i) a distribution made in accordance with sub- clause (c) or sub- clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets;”

But “dividend” does not include__

(i) A distribution made in accordance with sub-clause © or sub-clause

(d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets:

(ii) A distribution made in accordance with sub-clause(c)or sub-clause

(d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted of its equity shareholders after the 31^st day of March, 1964, and before the 1^st day of April, 1965

(ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ;

(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;

(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);

(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).

In simple words Provision of sec 2(22)(e) are as under, 2(22)(e) – Any Loan, Advances given by a closely held company.

(a) To a beneficial owner of equity share holding atleast 10% of Voting power. OR

(b) To any concern in which such share holder has a substantial interest any time during the previous year. OR

(c) Any payment made by a closely held company to a person on behalf of or for the individual benefit of such share holder

Meaning of Substantial Interest:-

Ownership interest of a business/concern that is greater than twenty percent (20%).

6. It was contention of learned AR that giving loans and advances was substantial business of EIPL, therefore, provisions of Section 2(22)(e) was not applicable. He contended that Equator Investment Pvt. Ltd. is an investment company and providing financial assistant is the business of the company. Therefore, the loan and advances received from the Equator Investment did not fall into the definition of dividend. Hence, provision of section 2(22)(e) could not be apply. For this purpose, reliance was placed on M/s. Shell Business (P) Ltd. Vs. ITO, ITA No,1737/K/07, Tanuj Holdings (P) Ltd., V/s. DCIT (2017) 88 Taxmann.com 385 (Kol-Trib) & Shri Jhamu U. Sughand v/s. CIT 2006 284 ITR 83 Mum.

7 .It was also contention of learned AR that 2(22)(e) is not applicable as assessee is not even a share holder of EIPL.

8. From the record, we observe that pattern of Share Holding of NHBPL and EIPL is as under:

The Shareholding Pattern of EIPL is as follows.

9. It is clear from the record that NHBPL doesn’t hold any shares in EIPL. As assessee is neither registered share holder nor beneficial share holder of the EIPL. Therefore, provisions of deemed dividend u/s. 2(22)(e) will not be applicable. The word ‘shareholder’ is followed by the expression ‘being a person who is the beneficial owner of shares’. This expression used in section 2(22)(e) both in the Act, and in the amended provisions with effect from 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. This provision also does not reduce the requirement of being a registered shareholder to a requirement of merely holding a beneficial interest in the shares without being a registered holder of shares. 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 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 percent of the voting power. However, in the instant case assessee is neither a registered shareholder nor a beneficial shareholder of EIPL, therefore, provisions of Sec 2(22)(e) will not be applicable.

10.. Hon’ble Supreme Court has approved the decision of Hon’ble Delhi High Court in case of Ankitech Pvt. Ltd., (2011) 199 Taxman 341, while deciding the Civil Appeal No.3961 of 2013. Hon’ble Supreme Court observed that once it is found that such a loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not shareholder, the provisions of Section 2(22)e cannot be applied. Hon’ble Supreme Court further observed as under:-

“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.”

11. Hon’ble Bombay High Court in the case of Impact Containers Ltd., (2014) 48 com294 observed that where certain companies advanced money to assessee-company in which one director of assessee was holding more than 10 per cent equity shares, since assessee itself was not shareholder of those lending companies, impugned addition made by Assessing Officer by invoking provisions of section 2(22)(e) was not sustainable.

12. Hon’ble Karnataka High Court in the case of Sarva Equity (P) Ltd., (2014) 44 com28 observed as under:

“Whether in terms of section 2(22)(e), it is only person whose name is entered in Register of shareholders of company as holder of shares who can be said to be a shareholder qua company and- not a person beneficially entitled to shares – Held, yes – Whether, therefore, it is only where a loan is advanced by company to registered shareholder and other conditions set out in section 2(22}(e) are satisfied, said amount of loan would be liable to be regarded as deemed dividend within  meaning of said section – Held, yes.”

13. In the case of CIT vs. AR Magnetics (P) Ltd., (2014) 220 Taxman 209 (Delhi) (HC) & CIT vs. Daisy Packers (P) Ltd., (2014) 220 Taxman 331 (Guj) (HC), the Court observed as under:-

“The assessee company had received loan from another company. The assessee was not a shareholder of the other company. However, there was a common shareholder (individual) who held more than 50% in both the companies. In view of the above facts the AO held that the amount received by the assessee from an another company was a deemed dividend u/s 2(22)(e) of the Act. The CIT(A) upheld the AO’s order. On further appeal, the Tribunal deleted the addition made by AO following the decision of the jurisdictional High Court in CIT v. Ankitech (P.) Ltd. 340 ITR 14 (Delhi) where it has been held that deemed dividend provisions cannot be invoked merely because there are common shareholders between the two companies. The High Court followed the aforesaid judgment and dismissed revenue’s appeal.”

14. From the record, we also found that assessee has not invested even a single rupee in share capital of EIPL. Both the companies EIPL as well as NHBPL are part of Gundecha Group of Companies. The transactions between the group companies were current and inter banking accounts containing both type of entries i.e. receipts and payments. There are total 61 transactions entered during the year on need basis. In case where both receipts and payments is taking place in inter banking accounts the same cannot be regarded as Loans and Advances as contemplated u/s 2(22)(e) and thus no addition could be made as Deemed Dividend. Our view is supported by the decision of Gujarat High Court in the case of Schutz Dishman Bio-tech (P) Ltd., (IT Appeal Nos. 958 & 959 of 2015 of 2015) (Guj. HC) observed as under:-

“If there are transactions in the form of current accommodation entries, they cannot be regarded to be loans and advances for the purpose of deemed dividend ”

15. ITAT Mumbai Bench in the case of Ravindra R Fotedar (2017) 85 com314 observed as under:-

“Whether where Assessing Officer made addition to assessee’s income “Under section 2(22)(e) in respect of loan given by one company to another company by taking a view that assessee was holding substantial interest i.e. more than ten per cent shareholding in both companies, in view of fact that transactions were in form of current accommodation entries and there was movement of funds in both ways on need basis, amount in question could not be regarded as deemed dividend and, consequently, impugned addition was to be deleted – Held, yes.”

16. Delhi Tribunal in the case of Saamag Developers (P) Ltd., (2018) 90 com20 observed as under:-

“Transactions between group concerns being current and inter banking accounts, additions made to assessee’s income under section 2(22)(e) in respect of amounts received from various group companies could not be considered as loans and advances as contemplated under section 2(22)(e), hence, no additions could be made as deemed dividend under section  2(22)(e).”

17. In view of the above judicial pronouncements since transaction between group companies were carried as inter banking accounts containing both the types of entries i.e., receipts and payments, having entitled these two transactions, the amount cannot be treated as deemed dividend in the hands of the assessee company.

18. Now we deal with the decisions relied by the CIT(A) for holding that amount received by the assessee is liable to be taxed as deemed dividend.

19. In the case of Gopal And Sons (HUF) v/s CIT [2017] 77 com71 SC, the assessee is a Hindu Undivided Family (HUF). During the previous year, the assessee had received certain advances from one M/s. G.S. Fertilizers (P) Ltd. (hereinafter referred to as the ‘Company’). The Company is the manufacturer and distributor of various grades of NPK Fertilizers and other agricultural inputs. In the audit report and annual return for the relevant period, which was filed by it before the Registrar of Companies (ROC), it was found that the subscribed share capital of the said Company was Rs. 1,05,75,000/- (le., 10,57,500 shares of Rs. 10/- each). Out of this, 3,92,500 number of shares were subscribed by the assessee which represented 37.12% of the total shareholding of the Company. From this fact, the AO concluded that the assessee was both the registered shareholder of the Company and also the beneficial owner of shares, as it was holding more than 10% of voting power. On this basis, after noticing that the audited accounts of the Company was showing a balance of Rs. 1,20,10,988/- as “Reserve & Surplus” as on 31st March, 2006, this amount was included in the income of the assessee as deemed dividend.

20. It is also found as a fact, from the audited annual return of the Company filed with ROC that the money towards share holding in the company was given by the assessee / HUF. Though, the share certificates were issued in the name of the Karta, Shri Gopal Kumar Sanei, but in the annual returns, it is the HUF which was shown as registered and beneficial shareholder. In any case, it cannot be doubted that it is the beneficial shareholder. Even if we presume that it is not a registered shareholder, as per the provisions of Section 2(22)(e) of the Act, once the payment is received by the HUF and shareholder (Mr. Sanei, karta, in this case) is a member of the said HUF and he has substantial interest in the HUF, the payment made to the HUF shall constitute deemed dividend within the meaning of clause (e) of Section 2(22) of the Act.

21. It is clear from the above order that all the parties have clearly held that HUF was real beneficial owner of the company, accordingly amount so received was correctly held to be deemed dividend. However, in the present case assessee neither a registered nor beneficial share holder of EIPL which is not disputed by the revenue authority. Hence, decision of Gopal and Sons HUF will not apply in present case. But it supports the contention of assessee that .addition cannot bemade in assessee’s hand because NHBPL is not a beneficial shareholder of EIPL.

22. In the case of National Travel Services [2018] 89 com332 (SC), the assesses is a partnership firm consisting of three partners, namely, Mr. Naresh Goyal, Mr. Surinder Goyal and M/s Jet Enterprises Private Limited having a profit sharing ratio of 35%, 15% and 50% respectively. The Assessee firm had taken a loan of Rs.28,52,41,516/- from M/s Jetair Private Limited, New Delhi. In this Company, the Assessee subscribed to the equity capital of the aforesaid Company in the name of two of its partners, namely, Mr. Naresh Goyal and Mr. Surinder Goyal totaling 48.19 per cent of the total shareholding. Thus Mr. Naresh Goyal and Mr. Surinder Goyal are shareholders on the Company’s register as members of the Company. They hold the aforesaid shares for and on behalf of the firm, which happens to be the beneficial shareholder.

23. However, in the present case assessee is neither registered shareholder nor beneficial shareholder of EIPL.

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 Ankitech P. Ltd. in Civil Appeal No.3961 of 2013 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 Vs. Ankitech P. Ltd. in Civil Appeal No.3961 of 2013 Hon’ble Supreme Court lay down the Law that for attracting section 2(22)(e) shareholder needs to be registered and beneficial share holder. 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/s Settlement Commission (IT & WT) (2009) 176 Taxman 421 (Kerala) 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 judgment 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 e. Registered as well as beneficial shareholder. Thus, as per observation of this decision also shareholder needs to be beneficial Shareholder. If the shareholder 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.

27. In view of the above discussion, we can safely conclude that since assessee was neither the beneficial nor the registered shareholder of the company, the amount so received is not liable to be taxed as deemed Moreover, the transaction between two group concerns were in the nature of current account and inter banking account containing both types of entries i.e., receipts and payments, the same cannot be brought in the purview of loans and advances so as to attract Section 2(22)(e).

28. In the result, appeal of the assessee is allowed.