ACIT Vs Shri Gurdeep Singh (ITAT Chandigarh)
The intention behind enacting provisions of section 2(22) (e) are 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 became 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. As per the provisions of section 2(22)(e) of the Act, such a deemed dividend is taxed in the hands of shareholder. 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 loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. Section 2(22)(e)of the Act, therefore, does not talk about the dividend actually declared or received. The dividend taken note of by this provision is a deemed dividend and not a real dividend. For certain purposes, the Legislature has deemed such a loan as ‘dividend’ and the effect of such deeming provision is that there is no option to the share holder to say that it is a mere loan and not his actual income. If it is proved that a loan has been given out of the accumulated profits of the company to the share holders having substantial interest in the company or to any other concern in which such a share holder has also substantial share holding, then as per the provisions of section 2(22) (e ) of the Act, there will be a presumption that such loan has been given for the benefit of the share holder and hence, is taxable in the hands of such a share holder. It has been made so by legal fiction created under section 2(22)(e)of the Act read with section 56 of the Act.
9. The words “deem” or “fiction” or irrebuttable presumption have not been defined in the Income Tax Act. For better understanding of the statutory presumptions and legal/deeming fictions, we deem it appropriate to refer to the relevant provisions of The Indian Evidence Act, 1872. Though the provisions of the Evidence Act are not strictly applicable to the procedures of this Tribunal as envisaged under the Income Tax Act, 1961, but the principles underlying the provisions of Evidence Act do constitute valuable guides. Section 4 of the Evidence Act, read as under:-
“4. “May presume”.—Whenever it is provided by this Act that the Court may presume a fact, it may either regard such fact as proved, unless and until it is disproved, or may call for proof of it. “Shall presume”.—Whenever it is directed by this Act that the Court shall presume a fact, it shall regard such fact as proved, unless and until it is disproved. “Conclusive proof”.—When one fact is declared by this Act to be conclusive proof of another, the Court shall, on proof of the one fact, regard the other as proved, and shall not allow evidence to be given for the purpose of disproving it.”
(emphasis supplied)
The Conclusive Presumptions/proofs can be considered as one of the strongest presumptions. With regards to Conclusive proofs, the law has absolute power and shall not allow any proofs contrary to the presumption. The general definition of Conclusive Proof is a condition when one fact is established beyond doubt, then the other facts or conditions become conclusive proof of another as declared under the relevant provision. Legal fictions compel to believe the existence of an artificial state of facts which may be contrary to the real state of facts. When a fiction is created by law, it is not open to anybody to plead or argue that the artificial state of facts created by law is not true. The basic purpose of a deeming provision is an assumption that something is true even though it may be untrue. It creates a presumption that accepts something as fact without the benefit of evidence and further the legal consequences of such facts have to follow accordingly. Under such circumstances, when on the proof of one fact, which, in the case in hand is fact of advancement of loan to the share holder or to the concern in which such a share holder is having substantial share holding, the other fact that such a loan is a diversion of the accumulated profits of the company for the benefit of such a shareholder, hence income of the share holder, is to be assumed automatically. For raising such an irrebuttable presumption, the first set of facts which are deemed to be conclusive proof of the other, i.e. regarding the advancement of loan to shareholder or to the concern in which such a share holder has substantial interest has to be proved strictly and beyond reasonable doubt and such first limb of the facts cannot be assumed or presumed merely on the basis of suspicion, howsoever strong it may be.
FULL TEXT OF THE ITAT JUDGEMENT
The present appeal has been preferred by the Revenue against the order dated 02.11.2017 of the Commissioner of Income Tax (Appeals)-3, Ludhiana [hereinafter referred to as ‘CIT (A)’].
2. The Revenue in this appeal has taken following grounds of appeal:-
1. Whether on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) was justified in deleting the addition of Rs. 12,24,72,654/- made by the Assessing Officer under section 2(22)(e) of the Income Tax Act by holding that the assessee was not having beneficial interest in the advance recipient Company after 08.05.2012 particularly when no prudential man will transfer its share without receiving the full sale consideration thereof ?
2. Whether on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) was justified in deleting the addition of Rs.12,24, 72,654/- made by the Assessing Officer under section 2(22)(e) of the Income Tax Act by holding that the assessee was not having beneficial interest in the advance recipient Company after 08.05.2012 particularly when the transferee Company has neither shown such shares as asset and unpaid sale consideration to the assessee as liability in its balance sheet for FY ending on 31.03.2013 nor any specific mention in this regard in the notes of account of the relevant year of the transferee Company ?
3. Whether on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) was justified in deleting the addition of Rs.12,24, 72,654/- made by the Assessing Officer under section 2(22)(e) of the Income Tax Act in view of the Supreme Court ruling referring the decision of its division bench to larger bench for reconsideration of its decision in the case of Ankitech ?
4. Whether on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) was justified in deleting the addition of Rs.12,24, 72,654/- made by the Assessing Officer under section 2(22)(e) of the Income Tax Act by holding that the said advance is for commercial expediency particularly when the law does not discriminate the advances and loans on the basis of chargeability of interest thereon ?
5. That the order of the Commissioner of Income Tax (Appeals) be set aside and that of the Assessing Officer be resorted to.
6. That the appellant craves leave to add or amend any ground of appeal before it is finally disposed off.
3. A perusal of the above grounds of appeal reveal that the revenue in this appeal has challenged the action of the CIT(A) in deleting the additions made by the Assessing Officer (in short ‘AO’) into the income of the assessee of deemed dividend u/s 2(22) (e) of the Income Tax Act, 1961 (in short ‘the Act’). The brief facts of the case are that the assessee filed his return of income for the assessment year 2013-14 on 31.03.2014, declaring a total taxable income of Rs. 4,04,74,160/-. However, the assessment was completed u/s 143(3) of the income Tax Act, 1961 (in short ‘the Act’) vide order dated 3 1.03.2016 at an income of Rs. 16,29,46,814/- by the Assessing Officer (AO) making the addition of Rs. 12,24,72,654/- on account of the deemed dividend in the hand of the assessee under the provisions of section 2(22)(e) of the Act. During the course of assessment proceedings it was noticed by the Ld. AO that the assessee was having shareholding in the following companies:-
1. Creative Cable Network Pvt. Ltd. – 99.60%
2. Jujhar Constructions and Travels Pvt. Ltd. – 99%
The AO further noted that both of these companies were closely held companies in which the assessee was having more than 10% shareholding. It was pointed out by the AO that M/s Creative Cable Network Pvt. Ltd. had advanced, unsecured loan to M/s Jujhar Constructions and Travels Pvt. Ltd., to the extent of Rs. 17,67,23,500/-. The Ld. A.O. show caused the assessee, as to why the amount of loan advanced to the extent of accumulated profits not to be held as deemed dividend as envisaged by section 2(22)(e) of the Income Tax Act, 1961 and taxed under ‘Income from other sources’ u/s 56 in the hands of assessee as he was having substantial shareholding in both the transacting companies.
In response to the same, the assessee vide letter dated 16.03.2016 submitted that during the year 2012-13 he had transferred his entire shareholdings in Creative Cables Pvt Ltd except one share to M/s Jujhar Constructions and Travels Pvt. Ltd. Hence, only one share was owned by the assessee in M/s Creative Cables Ltd out of the total Share of 25000 which was less than 10% of the total shares and rest of 24999 shares of the company were transferred to M/s Jujhar Construction Pvt. Ltd.(in short ‘JCPTL”). Thus, the company M/s Creative Cable Network Pvt. Ltd. was subsidiary of M/s Jujhar Constructions and Travels Pvt. Ltd. and thus any financial transactions between the holding company and subsidiary company was out of the purview of Section 2(22)(e) of the Income Tax Act.
Further, the assessee submitted that the group companies had provided the Inter Corporate Deposits for funding its Short term/long term business requirements. It was also submitted that the Creative Cable and Jujhar Advertisers had provided ICD of Rs. 18.67 crores to the JCTPL. The JCTPL had already given an amount of ₹. 38.56 crores as on 1.04.2012 to GS Majestic Development Pvt. Ltd. (GMDPL) and JCTPL had further advanced a sum of Rs. 8.07 to crores to GMDPL and used balance funds for business purposes and no individual benefit had been derived by the assesse.
4. However, the Assessing Officer did not agree with the above submissions of the assessee and rejected the plea of share transfer by the assessee holding the same as an afterthought transaction since the return with the Registrar was filed late and further concluded that advanced sum by CCNPL to JCTPL could not be treated as ICD on the following counts:-
