MTAR Technologices P.Ltd.,, Hyderabad v. ACIT, Hyderabad

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A HYDERABAD BEFORE SHRI G.C. GUPTA VICE PRESIDENT AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ITA NO.1162/HYD/2008 A.Y. 2003-2004 ITA NO.1163/HYD/2008 2004-2005 ITA NO.1166/HYD/2008 2005-2006 M/S MTAR TECHNOLOGIES (P) LTD. HYDERABAD (PAN HYDM 2650 E) ITA-NO.787-HYD/2009 M/S MARC MANUFACTURERS (P) LTD. HYDERABAD (NOW MERGED WITH MTAR TECHNOLOGIES (P) LTD. (PAN 2022R/M-135) VS ACIT CIRCLE 14(2) (TDS) HYDERABAD A.Y. 2005-06 DCIT CIRCLE 14(2) TDS HYDERABAD (APPELLANT) (RESPONDENT) ITA NO.1002/HYD/2008 A.Y. 2003-2004 ITA NO.1003/HYD/2008 2004-2005 ITA NO.1004/HYD/2008 2005-2006 ACIT CIRCLE 14(2) (TDS) HYDERABAD VS M/S MTAR TECHNOLOGIES (P) LTD. HYDERABAD (PAN HYDM 2650 E) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI K. VASANT KUMAR RESPONDENT BY : SHRI K.V.N. CHARYA DR O R D E R PER CHANDRA POOJARI ACCOUNTANT MEMBER: THE FIRST SIX APPEALS ARE CROSS APPEALS PREFERRED BY T HE ASSESSEE AS WELL AS THE REVENUE ARE DIRECTED AGAINST THE COM MON 2 2 ORDERS PASSED BY THE CIT(A) II HYDERABAD DATED 27.3. 2008 AND PERTAINS TO ASSESSMENT YEAR 2003-04 2004-05 AND 2005-06 . THE ASSESSEE ALSO PREFERRED BY APPEAL IN ITA NO.787/HYD/2009 DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A) V HYDERABAD DA TED 13.1.2009 AND PERTAINS TO ASSESSMENT YEAR 2005-06. SINCE COMMON ISSUE S ARE INVOLVED IN ALL THESE APPEALS THEY ARE CLUBBED TOGE THER HEARD TOGETHER AND DISPOSED OFF VIDE THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE ASSESSEE IN ITS APPEALS IN ITA NOS.1162 1163 AND 1166/HYD/2008 RAISED COMMON GROUNDS AS FOLLOWS: 1. THE CIT(A) ERRED BOTH ON FACTS AND IN LAW IN SO FAR AS IT IS PREJUDICIAL TO THE ASSESSEE. 2. THE ASSESSING OFFICER ERRED IN PASSING ORDERS U/S 2 01(1) AND 201(A) BEYOND THE PERIOD OF TWO YEARS FROM THE END OF THE ASSESSMENT YEAR. 3. THE CIT(A) ERRED IN HOLDING THAT THE PROVISIONS OF SEC.194 IS APPLICABLE TO THE AMOUNTS ADVANCED TO MARC MANUFACTURERS P LTD . 4. THE CIT(A) ERRED IN HOLDING THAT ADVANCES MADE TO M MPL COMES WITHIN THE PURVIEW OF PROVISIONS OF SEC.2(22) (E). 5. THE CIT(A) ERRED IN HOLDING THAT THE REPAYMENTS BY MMPL CANNOT BE CONSIDERED WHILE COMPUTING DEEMED DIVIDEND UNDER TH E PROVISIONS OF SEC.2(22) (E). 6. THE CIT(A) ERRED IN HOLDING THAT DEFERRED TAX ALSO SHOULD BE CONSIDERED WHILE CONSIDERING THE RESERVES AND SURPL USES FOR THE PURPOSES OF WORKING OUT DEEMED DIVIDEND WITHOUT APP RECIATING THE FACT THAT DEFERRED TAX IS A PROVISION AGAINST FUTUR E LIABILITY AND CANNOT BE CONSIDERED AS ACCUMULATED PROFIT. 7. THE CIT(A) ERRED IN HOLDING THAT AMOUNTS PAID AGAIN ST SUPPLIES ALSO HAS TO BE CONSIDERED FOR DIVIDEND WITHOUT APPRECIAT ING THE FACT THAT SUCH AMOUNTS ARE CONSIDERED BY MMPL AS TRADING RECE IPTS BY THEM AND THAT TREATING THEM AS DEEMED DIVIDEND AMOUNT TO TAX THE SAME AMOUNT TWICE. 3. THE GROUNDS RAISED BY THE REVENUE IN ITS APPEAL I TA NO.1002 1003 AND 1004/HYD/2008 WHICH ARE COMMON IN NA TURE AS FOLLOWS: 3 3 1. THE CIT(A) ERRED IN HOLDING THAT THE DIFFERENCE BET WEEN THE AMOUNT OF DEPRECIATION ADMISSIBLE UNDER THE INCOME TAX ACT AN D THE ACTUAL AMOUNT OF DEPRECIATION DEBITED IN THE BOOKS OF ACCO UNTS HAS TO BE DEDUCTED FOR THE PURPOSE OF COMPUTING ACCUMULATED PROFITS U/S 2(22) (E). 2. THE CIT(A) HAS FAILED TO APPRECIATE THE FACT THAT M AKING ADJUSTMENT TO BOOK PROFITS BY ALLOWING DEPRECIATION WHICH IS N OT DEBITED IN THE BOOKS OF ACCOUNTS IS NOT INTENDED BY THE LEGISLATU RE AND SUCH ADJUSTMENT IS ALSO NOT FEASIBLE CONSIDERING PROVIS IONS OF EXPLANATION 2 SEC.2(22). WHICH THE EXPRESSION ACCUMULATED PROF ITS IN SUB CLAUSES (A) (B) (D) AND (E) SHALL INCLUDE ALL PROFITS OF THE COMPANY UP TO THE DATE OF DISTRIBUTION OR PAYMENT REFERRED TO IN THOS E SUB CLAUSES. ALLOWING OF DEPRECIATION AS PROVIDED UNDER THE INCO ME TAX ACT UP TO THE DATE OF DISTRIBUTION OR PAYMENT IS NOT FEASIBL E. THUS ACCUMULATED PROFITS REFERRED TO IN SECTION 2(22)(E) IS ONLY CO MMERCIAL BOOK PROFITS DETERMINED AS PER THE BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE. 4. THE ASSESSEE RAISED GROUNDS IN ITS APPEAL IN ITA NO. 787/HYD/2009 AND THE SAME ARE REPRODUCED HEREIN BELOW: 1. THE CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT THE ASSESSEE IS NOT A SHARE HOLDER AND HENCE THERE CANNOT BE ANY DI VIDEND FROM THE OTHER COMPANY MUCH LESS DEEMED DIVIDEND AND THEREFO RE ERRED IN CONFIRMING THE ADDITION OF DEEMED DIVIDEND IN THE A SSESSEES CASE. 2. THE CIT(A) ERRED IN HOLDING THAT THERE IS SUFFICIEN T RESERVES AND SURPLUS TO HOLD RS.3 75 00 000 ADVANCED BETWEEN 1.4 .04 TO 7.4.04 AS DEEMED DIVIDEND U/S 2 (22) WITHOUT APPRECIATING THE FACT THAT IF DIFFERED TAX AND DEPRECIATION ALSO IS CONSIDERED FO R DEDUCTION THERE WILL NOT BE THAT MUCH RESERVES AND SURPLUSES ON THA T DATE. 3. THE CIT(A) ERRED IN HOLDING THAT DIFFERED TAX ALSO HAS TO BE CONSIDERED AS AVAILABLE RESERVES AS SURPLUS. 4. THE CIT(A) ERRED IN HOLDING THAT DEPRECIATION CANNO T BE CALCULATED IN THE MIDDLE OF THE YEAR WHILE COMPUTING THE AVAILABL E RESERVES AND SURPLUS AND THEREBY ERRED IN HOLDING THAT DURING TH E PERIOD 3.1.05 TO 12.2.2005 RS.80/- LAKHS IS AVAILABLE AS RESERVES T O HOLD THE AMOUNT ADVANCED AS DEEMED DIVIDEND U/S 2 (22). 5. THE CIT(A) FAILED TO APPRECIATE THE FACT THAT DIVID END CAN BE TAXED ONLY IN THE HANDS OF A SHARE HOLDER AND THEREBY ERR ED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER ASSESSING DEEME D DIVIDEND IN THE HANDS OF THE ASSESSEE THOUGH IT IS NOT A SHARE HOLD ER OF THE COMPANY WHICH ADVANCED THE AMOUNTS. 5. BRIEF FACTS OF THE CASE IN ASSESSEES APPEALS IN ITA NO. 1162 1163 AND 1166/HYD/2008 AND IN REVENUE APPEALS IN IT A NOS.1002 TO 4 4 1004/HYD/2008 ARE THAT A SURVEY U/S 133A WAS CONDUCTED I N THE CASE OF THE ASSESSEE DURING THE SURVEY IT WAS NOTICED THAT THE ASSESSE E IS A CLOSELY HELD COMPANY REPORTING SUBSTANTIAL PROFITS. IT WAS ALSO NOTICED THAT THE COMPANY HAD TRANSFERRED HUGE AMOUNTS AS LOANS T O A SISTER CONCERN NAMED MARC MANUFACTURERS P LTD. (MMPL) YEAR AFTE R YEARS. IT WAS ALSO FOUND THAT MAJORITY OF THE SHAREHOLDERS IN BOT H THE COMPANIES ARE COMMON. AFTER VERIFYING THE BOOKS THE ASSESSING OFFI CER FOUND THAT THE FOLLOWING AMOUNTS HAD BEEN TRANSFERRED BY THE ASSESS EE COMPANY TO MMPL IN THE FINANCIAL YEARS 2002-03 TO 2004-05 RELEVA NT TO ASSESSMENT YEARS 2003-04 TO 2005-06. FINANCIAL YEAR ASST. YEAR AMOUNT 2002-03 2003-04 RS.1 50 00 000 2003-04 2004-05 RS.2 07 65 433 2004-05 2005-06 RS.4 65 00 000 5.1. SINCE TWO SHARE HOLDERS OF THE ASSESSEE COMPANY VIZ . P. JAYAPRAKASH REDDY AND SMT. P. LEELAVATI HOLDING MORE THAN 10% AND 20% OF THE VOTING RIGHTS RESPECTIVELY WERE ALSO SHAREHOL DERS OF MMPL HAVING MORE THAN 20% OF THE VOTING RIGHTS IN THAT COM PANY THE ASSESSING OFFICER WAS OF THE VIEW THAT THE AMOUNT OF LOAN ADVANCED BY THE ASSESSEE COMPANY TO MMPL WOULD ATTRACT THE PROVISIONS O F SEC.2(22)(E) OF THE IT ACT MEANING THEREBY THAT THE AM OUNT RECEIVED BY MMPL WOULD BE DEEMED DIVIDEND IN ITS HAND AS THE PROV ISIONS OF SEC.2(22) (E) TO THE EXTENT OF ACCUMULATED PROFIT POSSESSE D BY THE ASSESSEE COMPANY. THE ASSESSING OFFICER EXAMINED THE BALANCE SHEET OF THE ASSESSEE COMPANY FOR THE YEAR ENDING 31.3.2003 31.3 .2004 AND 31.3.2005 AND FOUND THAT THE COMPANY HAD THE FOLLOWI NG ACCUMULATED PROFITS: FINANCIAL YEAR ENDING ON (AMOUNT RS. 5 5 31.3.2003 3 43 30 194 31.3.2004 6 81 08 367 31.3.2005 7 75 28 843 5.2. ACCORDINGLY IN TERMS OF PROVISION OF SEC.2(22)(E) OF THE IT ACT THE ASSESSING OFFICER HELD THAT THE AMOUNT OF LOAN E XTENDED BY THE ASSESSEE COMPANY TO MMPL CONSTITUTED DEEMED DIVIDEND TO THE EXTENT OF ACCUMULATED PROFIT AVAILABLE WITH THE ASSESSEE COMPANY IN EACH OF THE EARLIER FINANCIAL YEAR AS ABOVE. HAVING H ELD SO THE ASSESSING OFFICER INVOKED THE PROVISION OF SEC. 194 OF THE IT ACT STATING THAT THERE WAS AN OBLIGATION ON THE PART OF THE ASSESSEE COMPANY TO DEDUCT THE TAX AT SOURCE IN RESPECT OF THE DEEMED DIVID END PAID TO MMPL. SINCE THE ASSESSEE COMPANY HAD NOT DEDUCTED THE T AX AT SOURCE AS REQUIRED U/S 194 OF THE IT ACT THE ASSESSING OFFICER I SSUED SHOW CAUSE TO THE ASSESSEE COMPANY AS TO WHY IT SHOULD NOT BE TRE ATED AS AN ASSESSEE IN DEFAULT IN TERMS OF SEC.201(1) R.W.S. 194 OF THE IT ACT. 5.3. IN RESPONSE TO THE SHOW CAUSE NOTICE THE ASSESSEE COMPANY THROUGH ITS AUTHORIZED REPRESENTATIVE FILED D ETAIL REPLY REQUESTING THE ASSESSING OFFICER NOT TO TREAT IT AS AN ASSESS EE IN DEFAULT. FOLLOWING ARE THE CONTENTIONS RAISED BY THE ASSESSEE BEFOR E THE ASSESSING OFFICER: A) M/S MARC MANUFACTURERS P LTD IS NOT A SHARE HOLDER OF TH E ASSESSEE COMPANY AND AS SUCH THE PROVISIONS OF SEC.2 (22) (E) WOULD NOT APPLY. B) THEY WERE UNDER BONAFIDE IMPRESSION THAT THE AMOUNT G IVEN TO MMPL IS NOT INCOME IN THE HANDS OF MMPL AND HENCE THER E WAS NO OBLIGATION ON ITS PART TO DEDUCT TAX AT SOURCE FROM SUCH PAYMENTS. C) PROVISION OF SEC.194 WILL NOT ATTRACT SINCE THE PAYEE I. E. MMPL IS NOT A SHARE HOLDER IN THE ASSESSEE COMPANY. 6 6 D) ON THE DATE OF ADVANCE THE LOAN THERE ARE NO ACCUMUL ATED PROFITS. E) THE AMOUNTS IN QUESTION ARE DEPOSITS AND NOT LOANS AND HENCE THE PROVISIONS OF SEC.2(22) (E) WILL NOT BE APPLICABLE . 5.4. HOWEVER THE EXPLANATION SUBMITTED BY THE ASSESSE E WAS NOT ACCEPTED BY THE ASSESSING OFFICER. AS REGARDS THE FIRST CONTENTION THE ASSESSING OFFICER HELD THAT AFTER AMENDMENT TO 2(22 )(E) W.E.F. 1.4.1988 THE SCOPE OF SHARE HOLDER HAS BEEN ENLARGED A ND THE ARGUMENT OF THE ASSESSEE IS NO MORE VALID. THE ASSESSING OF FICER REFERRED TO THE DECISION OF ITAT HYDERABAD IN THE CA SE OF HYDERABAD CHEMICAL PRODUCTS P LTD. VS. ITO (72 ITD 323) WHEREIN IT WAS HELD THAT EVEN THOUGH THE PAYEE COMPANY WAS NOT A DIRECT SHARE H OLDER IN THE PAYER COMPANY BUT IN VIEW OF THE AMENDED PROVISIONS O F SEC. 2(22)(E) THE LOAN GIVEN BY THE PAYER COMPANY WOULD BE DEEMED DIVIDEND. THE ASSESSING OFFICER ALSO REFERRED TO THE DECISION OF ITAT D ELHI BENCH IN THE CASE OF BHARATHI OVERSEAS TRADING CO. DCIT (106 TAXMAN 172) DECIDED IN FAVOUR OF THE REVENUE. 5.5. AS REGARDS THE SECOND CONTENTION OF THE ASSESSEE TH AT IF THE AMOUNT RECEIVED BY THE PAYEE IS NOT INCOME THERE WAS N O NEED TO DEDUCT TAX AT SOURCE THE ASSESSING OFFICER OBSERVED THAT I N VIEW OF THE FICTION CREATED IN SEC. 2(22)(E) OF THE ACT IN TREATING CERTAIN AMOUNTS AS DEEMED DIVIDEND THE SAIDE AMOUNTS ARE LIABLE TO TDS IN ACCORDANCE WITH THE PROVISIONS OF SEC.194 OF THE ACT. AS REGARD S THE CONTENTION THAT SEC.194 APPLIES ONLY IF THE PAYEE IS THE SHARE HOLD ER AND SINCE THE RECEIPIENT IS NOT A SHARE HOLDER AND THAT THERE WAS NO MANDATE TO DEDUCT TAX ON THE DEEMED DIVIDEND THE ASSESSING OFFICER OBSERVED THAT SEC.194 CLEARLY MANDATES TO DEDUCT TAX AT SOURCE ON DIVIDE ND INCLUDING DEEMED DIVIDEND. THERE IS CLEAR REFERENCE TO DEEMED D IVIDEND U/S 2(22)(E) IN SEC.194 OF THE ACT. SINCE THE DEEMED DIVID END DID NOT 7 7 ATTRACT DIVIDEND DISTRIBUTION TAX U/S 115 OF THE ACT TH E PROVISION OF TDS U/S 194 WOULD AUTOMATICALLY COME INTO OPERATION. 5.6. AS REGARDS THE CONTENTION OF NON AVAILABILITY O F ACCUMULATED PROFIT AS ON THE DATE OF ADVANCE THE ASSESSEE HAD EMPHASI ZED THAT IT WOULD HAVE POSSESSED THE PROFIT DERIVED BY IT. SINCE T HE PROFIT HAD BEEN SPENT ON INSTALLATION OF PLANT MACHINERY INVEST MENTS AND OTHER CURRENT ASSETS ETC. THERE WAS NO PROFIT AVAILABLE FOR THE PURPOSE OF ATTRACTING THE PROVISIONS OF DEEMED DIVIDEND. TO THIS M THE ASSESSING OFFICER OBSERVED THAT THE ACCUMULATED PROFITS CONTEMPLATE D U/S SEC. 2(22)(E) OF THE ACT REPRESENTS COMMERCIAL PROFIT ARRIVE D AT AS PER THE COMPANIES ACT. BY NO STRETCH OF IMAGINATION THE CASE LA WS SUBMITTED BY THE ASSESSEE CAN BE CONSIDERED AS THE BASIS FOR DETERMINAT ION OF ACCUMULATED PROFIT. 5.7. REBUTTING THE STAND TAKEN BY THE ASSESSEE THAT THE AMOUNT IN QUESTION ARE DEPOSITS AND NOT LOANS THE ASSESSING OFF ICER OBSERVED THAT THE ASSESSEE HAS TAKEN THIS PLEA TO AVOID THE PROVISI ON OF SEC. 2(22)(E) THE ASSESSING OFFICER FURTHER OBSERVED THAT IT I S A SELF SERVING STATEMENT NOT SUPPORTING BY THE FACTS ON RECORD SINCE THE BOOKS OF ACCOUNTS AS ALSO THE NARRATION IN THE LEDGER ACCOUNT CLEAR LY INDICATE THE AMOUNTS AS LOAN. FURTHER THE BALANCE SHEET THE OUTST ANDING AMOUNT HAS BEEN SHOWN UNDER THE HEAD LOANS AND ADVANCES. S IMILARLY IN THE BALANCE SHEET OF MMPL (THE PAYEE) THE AMOUNT WAS SHOW N UNDER THE HEAD UNSECURED LOANS. THE ASSESSING OFFICER REFERRED TO THE NOTE TO THE AUDITORS REPORT IN THE CASE OF THE PAYEE COMPANY W HEREIN IT WAS STATED THAT THE COMPANY DID NOT ACCEPT ANY DEPOSIT. ON THE OTHER HAND THERE WAS CLEAR REFERENCE IN THE AUDIT REPORT FOR FINA NCIAL YEAR 2002-03 2003-04 AND 2004-05 OF THE ASSESSEE COMPANY THAT IT HAD GIVEN UNSECURED LOAN TO COMPANIES UNDER THE SAME MANAGEMENT. SIMILAR REFERENCE WAS ALSO THERE IN THE AUDITORS NOTE TO TH E AUDITED ACCOUNTS 8 8 OF THE PAYEE COMPANY (MMPL). THE ASSESSING OFFICER ALSO O BSERVED THAT SEC. 2(22)(E) REFERS NOT ONLY TO LOAN AND ADVANCE BUT A LSO TO ANY PAYMENT AND HENCE THE ASSESSEES CASE CLEARLY FITS INTO THE PROVISION OF SEC. 2(22)(E) OF THE ACT. 5.8. THUS AFTER CONSIDERING ALL THE OBJECTIONS RAISED B Y THE ASSESSEE THE ASSESSING OFFICER CAME TO THE CONCLUSION THAT THE AMOUNTS GIVEN BY THE ASSESSEE COMPANY TO MMPL IN THE FINANCIAL YEAR 2002-03 20003-04 AND 2004-05 ARE DEEMED DIVIDEND ON WHICH TH E ASSESSEE SHOULD HAVE DEDUCTED TAX AT SOURCE U/S 194 OF THE ACT. HAVING FAILED TO DO SO THE ASSESSEE WAS REQUIRED TO BE TREATED AS AN ASSESSEE IN DEFAULT U/S 201(1) OF THE ACT. FURTHER THE ASSESSING OFFICER OBSER VED THAT THE ASSESSEE IS LIABLE TO INTEREST U/S 201 (1A) OF THE ACT. TH E DEEMED DIVIDEND WAS WORKED OUT BY THE ASSESSING OFFICER ON THE BASIS OF AVAILABLE ACCUMULATED PROFIT. THE DEEMED DIVIDEND W ORKED OUT AND THE DEMAND RAISED FOR THE THREE YEARS ARE AS FOLLOWS: DEMAND U/S 201(1A) (RS.) DEEMED DIVIDEND (RS. DEMAND U/S 201(1) (RS.) DEMAND U/S 201(1A) (RS.) 2003 04 1 50 00 000 33 66 000 15 98 850 2004-05 2 07 65 433 46 59 763 15 84 319 2005-06 4 17 63 410 93 71 709 20 61 776 6. ON APPEAL TO CIT(A) HELD THAT THE PAYMENT MAD E BY ASSESSEE TO M/S MARC MANUFACTURERS (P) LTD. (MMPL) WOULD FALL WITHIN THE PURVIEW OF SEC.2(22)(E) OF THE IT ACT. FURTHER OB SERVED THAT SEC.194 OF THE IT ACT NOWHERE STATES CATEGORICALLY THE P AYING HAS TO BE A REGISTERED SHARE HOLDER OF THE PAYER COMPANY. OTHER WISE ALSO THE PAYMENT MADE BY THE ASSESSEE TO MMPL HAS ALREADY BEEN FA XED SUBSTANTIVELY AS DEEMED DIVIDEND IN THE HANDS OF THE MMPL (I.E. PAYEE). ACCORDING TO CIT(A) M/S MMPL FALLS WITHIN TH E MEANING OF 9 9 SHARE HOLDER IN SEC.2(22)(E) OF THE ACT WHICH IS SUBSTAN TIVE FOR BRINGING THE PAYMENT TO TAX NET THAT INTERPRETATI ON OF SHARE HOLDER WOULD ALSO HOLD GOOD FOR THE CORRESPONDING TDS PROVISIO N OF SEC.194 . ACCORDINGLY HE HELD THAT THE PAYMENT MADE BY THE ASSESSE E COMPANY FALLS WITHIN THE PURVIEW OF SEC.2(22)(E) AS SUCH PROVISI ONS OF SEC.194 IS APPLICABLE. SINCE THE ASSESSEE NOT DEDUCTED THE TAX AT SO URCE FOR SUCH DEEMED DIVIDEND THE ASSESSEE IS IN DEFAULT FOR WHICH PROV ISIONS OF SECTION 201(1) AND 201(1A) ARE APPLICABLE. REGARDIN G THE COMPUTATION OF ACCUMULATED PROFIT FOR DECIDING THE QUANTUM OF D IVIDEND THERE IS ALSO DISPUTE. THE ASSESSING OFFICER WHILE CONSIDERING THE AMOUNT RECEIVED FROM THE ASSESSEE BY MMPL DID NOT CONSIDER REPAY MENT MADE BY MMPL AND TOOK INTO CONSIDERATION THE GROSS AMOUNT R ECEIVED BY MMPL FROM THE ASSESSEE. THE ASSESSEE CONTENDED BEFORE THE CIT (A) THAT REPAYMENT AMOUNT SHOULD BE REDUCED WHILE CALCULATI NG THE DEEMED DIVIDEND U/S 2(22) (E). THE ASSESSEE ALSO CONTENDED BEF ORE CIT (A) THAT THE ASSESSING OFFICER WRONGLY ARRIVED ACCUMULATED PRO FIT BY CONSIDERING DEPRECIATION AS PROVIDED IN THE BOOKS OF ACCO UNTS WITHOUT CONSIDERING DEPRECIATION AS PER IT ACT. THERE IS ALSO DISP UTE REGARDING THE INCLUSION OF DEFERRED TAX RESERVE WITHIN THE RESERV E SURPLUS WHICH IS CONSIDERED AS PART OF ACCUMULATED PROFIT. FURTHER THE ASSESSEE CONTENDED BEFORE CIT(A) IN VIEW OF THE EXPLANATION 2 BELOW CLAUSE (E) OF SUB SEC.22 OF SEC.2 THE DAY TO DAY ACCUMULATED PROFIT T O BE CONSIDERED. THE CIT(A) REJECTED THIS GROUND PLACING REL IANCE ON VARIOUS ORDERS OF TRIBUNALS AS WELL AS BOMBAY HIGH COURT BY HOLD ING THAT EVEN ON THE DATE OF CREDIT ENTRIES FOR THE OFF LOADING AM OUNT THE BALANCE IN THE ACCOUNT OF MMPL (THE PAYEE) WERE SHOWING DEBIT BAL ANCE THUS THE PAYMENTS MADE BY THE ASSESSEE TO MMPL ARE STILL TO BE TRE ATED AS ADVANCE WITHIN THE AMBIT OF SEC.2(22)(E) OF THE IT ACT . THE ASSESSEE IS IN APPEAL BEFORE US ON THE ISSUE RELATING TO INVOKING THE PROVISIONS OF SEC. 201 AND 201(1A) ON THE REASON THAT THE PROVISION S OF SEC.194 IS APPLICABLE ON ADVANCE MADE TO MMPL COMES WITHIN THE PUR VIEW OF 10 10 PROVISIONS SEC.2(22) (E). THE ASSESSEE IS ALSO DISPUTED BEF ORE US THE ISSUE RELATING TO COMPUTATION OF ACCUMULATED PROFIT BY I NCLUDING DEFERRED TAX IN THE RESERVES AND SURPLUS. FURTHER THE ASSESSEE TAK EN A PLEA BEFORE THE CIT(A) THAT PAYMENT IS MADE TO MMPL IS DE POSITS AND NOT LOANS. FURTHER TAKEN A PLEA THAT SOME AMOUNTS WERE PAI D TO MMPL AGAINST CERTAIN SUPPLIES MADE BY THEM AND PLEADED PAYM ENT AGAINST SUPPLIES SHOULD BE REDUCED FOR THE PURPOSE OF CALCULATION OF DEEMED DIVIDEND. THIS PLEA OF THE ASSESSEE IS REJECTED BY THE CI T (A). AGAINST ALL THESE FINDINGS THE ASSESSEE IS ALSO IN APPEAL BEFORE US. 7. THE REVENUE IS HAVING GRIEVANCE ON DIRECTION GIVE N BY CIT(A) RELATING TO CONSIDERATION OF DEPRECIATION AS PE R INCOME TAX ACT WHILE COMPUTING THE ACCUMULATED PROFITS U/S 2(22) (E). 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE T HERE IS NO DEEMED DIVIDEND IN THE HANDS OF RECIPIENTS COMPANY I.E . M/S MMPL AS THIS ISSUE RELATING TO THE TREATMENT OF THIS IMPUGN ED AMOUNT IN THE RECIPIENT HANDS WAS CONSIDERED BY THIS TRIBUNAL B BENCH VIDE ORDER DATED 31.8.2009 FOR THE ASSESSMENT YEAR 2004-05 IN ITA NO.555/HYD/2008 AND THE SAME WAS DECIDED IN FAVOUR OF T HE ASSESSEE BY HOLDING AS FOLLOWS: 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RECORD. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE H AD RECEIVED A SUM OF RS.1 98 00 000 FROM M/S MTAR TECHNOLOGIES P LTD. HA S ACCUMULATED PROFITS TO THE TUNE OF RS.6 13 58 367/- AS ON 31.3.2004. T AKING THIS AMOUNT INTO ACCOUNT THE ASSESSING OFFICER CAME ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN LAW THE LEARNED CIT(A) HAS ERRED IN THE CONCLUSION THAT THE AMOUNT OF RS.1 98 00 000 HAS BEEN ADVANCED BY M/S M TAR TECHNOLOGIES OUT OF THE ACCUMULATED PROFITS. HE FURTHER CAME TO THE CONCLUSION THAT THE AMOUNT AGGREGATING TO RS.1 98 00 000 WHICH HAS BEEN ACCEPTED BY THE ASSESSEE COMPANY DURING THE ACCOUNTING YEAR RELEVA NT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) HAS ERRED IN THE ASSESSMENT YEAR 2004-05 CONSTITUTES DEEMED DIVIDEND AS PER THE PROVISIONS OF SEC.2(22)(E) OF THE ACT IN THE ASSESSEES CASE. HE FURTHER BROUGHT THE AMOUNT TO TAX AS DEEMED DIVIDEND INCOME IN THE ASSE SSEES CASE UNDER THE HEAD INCOME FROM OTHER SOURCES FOR THE YEAR UNDER CONSIDERATION. THE 11 11 ASSESSEES EXPLANATION WAS NOT ACCEPTED BY THE ASSE SSING OFFICER. FROM THE ASSESSMENT RECORDS IT IS SEEN THAT THE ASSESSEE HA S SENT A DETAILED REPLY DATED 20.12.2006. FROM THE FACTS IT IS SEEN THAT M/S MARC MANUFACTURERS IS NOT A SHAREHOLDER IN MTAR TECHNOLOGIES P LTD. IT I S ONLY TWO DIRECTORS OF THE ASSESSEE ARE THE SHAREHOLDERS OF MTAR TECHNOLOGIES P LTD. FOR BETTER APPRECIATION THE RELEVANT PROVISIONS OF SECTION 2 (22)(E) ARE EXTRACTED AS UNDER: ANY PAYMENT BY A COMPANY NOT BEING A COMPANY I N WHICH PUBLIC ARE SUBSTANTIALLY INTERESTED OF ANY SUM WHE THER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE MADE AFTE R THE 31 ST OF MAY 1987 BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER BEING A PE RSON WHO IS THE BENEFICIAL OWNER WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPAT E IN PROFITS HOLDING NOT LESS THAN 10% OF THE VOTING POWER OR TO ANY CONCER N IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH H E HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFERRED TO AS T HE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF OR FOR THE I NDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDERS TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESS ACCUMULATED PROFITS. THE MUMBAI BENCH OF THE TRIBUNAL IN ITA NO.6182/ MUM/2008 CONSIDERED THE SIMILAR ISSUE AS UNDER: 6. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PA RTIES. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THOUGH SHRI VALI M. KASIM WHO IS DIRECTOR OF THE ASSESSEE COMPANY AND ALSO DIRECTOR AND SHAREHOL DER IN THE OTHER GROUP COMPANIES NAMELY (1) ENDOVASCULAR THERAPEUTICS (I) PVT. LTD . 2)INVATEC (I) PVT. LTD. (3) VASCULAR THERAPEUTICS I PVT. LTD. AND 4) MANSOROVAR ESTATE MANAGEMENT CONSULTANT P LTD. BUT AT THE SAME TIME N ONE OF THE COMPANIES IS THE SHARE HOLDER OF THE ASSESSEE COMPANY. IT IS AR GUED THAT THE DIVIDEND INCOME CAN BE RECEIVED ONLY BY THE SHAREHOLDER AND AS THE ASSESSEE COMPANY IS NOT THE SHARE HOLDER OF THE OTHER GROUP COMPANIE S HENCE THE ADVANCES RECEIVED CANNOT BE TREATED AS A DEEMED DIVIDEND. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF THE SPECIAL BENCH OF MUMBAI IN THE CASE OF ACIT VS BHAUMIK COLORS P LTD. IN 27 SOT (MUM) ( SB) AND ALSO CIT VS. HOTEL HILL TOP IN 217 ITR 527 (RAJ). WE HAVE HEARD THE LEARNED DEPARTMENTAL REPRESENTIATIVE ON THIS ISSUE. 7. AS PER THE FACTS ON RECORD THE ASSESSEE COMPANY IS HAVING NO SHARE HOLDING IN THE OTHER GROUP COMPANIES. IT IS WELL S ETTLED PRINCIPLE THAT DIVIDEND INCOME IS ONLY RECEIVED BY THE SHARE HOLDE R. IDENTICAL ISSUE HAS COME FOR CONSIDERATION BEFORE THE HONBLE SPECIAL B ENCH ITAT MUMBAI IN THE CASE OF BHAUMIC COLORS P LTD. (SUPRA) AND IT IS HEL D AS UNDER: 35. THE BASIS OF BRINGING IN THE AMENDMENT TO SE CTION 2(22)(E) OF THE ACT BY THE FINANCE ACT 1987 W.E.F. 1-4-1998 IS TO ENSURE THAT PERSONS WHO CONTROL THE AFFAIRS OF A COMPANY AS WELL AS THA T OF A FIRM CAN HAVE PAYMENT MADE TO A CONCERN FROM THE COMPANY AND THE PERSON WHO CAN CONTROL THE AFFAIRS OF THE CONCERN CAN DRAW THE SAM E FROM THE CONCERN INSTEAD OF THE COMPANY DIRECTLY MAKING PAYMENT TO THE SHARE HOLDER AS DIVIDEND. THE SOURCES OF POWER TO CONTROL THE AFFAIRS OF THE COMP ANY AND THE CONCERN IS THE BASIS ON WHICH THESE PROVISIONS HAVE BEEN PROVISION S AS CONTEMPLATING A CHARGE TO TAX IN THE HANDS OF THE CONCERN. A LOAN OR ADVANCE RECEIVED BY A CONCERN IS DEEMED ACCRUAL OF INCOME EVEN U/S5(1)(B) IN THE HANDS OF THE SHAREHOLDER ONLY AND NOT IN THE HANDS OF THE PAYEE VIZ. NON SHAREHOLDER 12 12 (CONCERN). SEC. 5(1)(A) CONTEMPLATES THAT THE RECE IPT OR DEEMED RECEIPT SHOULD BE IN THE NATURE OF INCOME. THEREFORE THE DEEMING FICTION CAN BE ADOPTED ONLY IN THE HANDS OF THE SHAREHOLDERS AND N OT THE NON SHAREHOLDER VIZ. THE CONCERN. 36. THE DEFINITION OF DIVIDEND U/S 2(22)(E) OF THE ACT IS AN INCLUSIVE DEFINITION. SUCH INCLUSIVE DEFINITION ENLARGES THE MEANING OF THE TERM DIVIDEND ACCORDING TO ITS ORDINARY AND NATURAL ME ANING TO INCLUDE EVEN A LOAN OR ADVANCE. ANY LOAN OR ADVANCE CANNOT BE DIV IDEND ACCORDING TO ITS ORDINARY AND NATURAL MEANING. THE ORDINARY AND NAT URAL MEANING OF THE TERM DIVIDEND WOULD BE A SHARE IN PROFITS TO AN INVESTOR IN THE SHARE CAPITAL OF A LIMITED COMPANY. TO THE EXTENT THE MEANING OF THE WORD DIVIDEND IS EXTENDED TO LOANS AND ADVANCE TO A SHAREHOLDER OR T O A CONCERN IN WHICH A SHAREHOLDER IS SUBSTANTIALLY INTERESTED DEEMING THE M AS DIVIDEND IN THE HANDS OF A SHAREHOLDER THE ORDINARY AND NATURAL MEANING O F THE WORD DIVIDEND IS ALTERED. TO THIS EXTENT THE DEFINITION OF THE TERM DIVIDEND CAN BE SAID TO ADVANCE TO A NON SHAREHOLDER THE ORDINARY AND NATUR AL MEANING OF THE WORD DIVIDEND IS TAKEN AWAY. IN THE LIGHT OF THE INTENT ION BEHIND THE PROVISIONS OF SECTION 2(22) (E) TO EXTEND THE LEGAL FICTION TO A CASE OF LOAN OR ADVANCE TO A NON SHAREHOLDER CANNOT BE TAXED AS DEEMED DIVIDEND IN THE HANDS OF A NON SHAREHOLDER. 8. THE HONBLE SPECIAL BENCH HAS ALSO REFERRED T O AND RELIED ON THE PRINCIPLES LAID DOWN BY THE HONBLE HIGH COURT OF R AJASTHAN IN THE CASE OF HOTEL HILL TOP (SUPRA) IN WHICH IT IS HELD AS UNDE R : 7. THE MORE IMPORTANT ASPECT BEING THE REQUIREME NT S.2(22) (E) IS THAT THE PAYMENT MAY BE MADE TO ANY CONCERN IN WHI CH SUCH SHAREHOLDER IS A MEMBER OR THE PAYMENT BY ANY SUCH COMPANY ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SH AREHOLDER. THUS THE SUBSTANCE OF THE REQUIREMENT IS THAT THE PAYMENT S HOULD BE MADE ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER OBVIOUSLY THE PROVISION IS INTENDED TO ATTRACT THE LIABILITY OF TAX ON THE PERSON ON WHOSE BEHALF OR FOR WHOSE INDIVIDUAL BEN EFIT OF ANY SUCH SHAREHOLDER OBVIOUSLY THE PROVISION IS INTENDED T O ATTRACT THE LIABILITY OF TAX ON THE PERSON ON WHOSE BEHALF COMPANY WHETHE R TO THE SHAREHOLDER OR TO THE CONCERNED DEEMED DIVIDEND. OBVIOUSLY INCOME FROM DIVIDEND IS TAXABLE AS INCOME FROM OTHER SOUR CES U/S 56 OF THE ACT AND IN THE VERY NATURE OF THINGS THE INCOME HA S TO BE OF THE PERSON EARNING THE INCOME . THE ASSESSEE IN THE PRESENT C ASE IS NOT SHOWN TO BE ONE OF THE PERSONS BEING SHAREHOLDER. OF COURS E THE TWO INDIVIDUALS BEING ROOP KUMAR AND DEVENDRA KUMAR ARE THE COMMON PERSONS HOLDING MORE THAN REQUISITE AMOUNT OF SHAREHOLDING AND ARE HAVING REQUISITE INTEREST IN THE FIRM BUT THEN THEREBY T HE DEEMED DIVIDEND WOULD NOT BE DEEMED DIVIDEND IN THE HANDS OF THE FI RM RATHER IT WOULD OBVIOUSLY BE DEEMED DIVIDEND IN THE HANDS OF THE IN DIVIDUALS ON WHOSE BEHALF OR ON WHOSE INDIVIDUAL BENEFIT BEING SUCH S HAREHOLDER THE AMOUNT IS PAID BY THE COMPANY TO THE CONCERN. THE ABOVE FACTS ARE AKIN TO THE FACTS OF THE INSTAN T CASE. THE MUMBAI BENCH OF THE TRIBUNAL TAKING THE NOTE OF THE SPECIAL BENC H DECISION IN THE CASE OF ACIT VS. BHAUMIC COLOR (P) LTD. (2009) 27 SOT 270 A LLOWED THE CLAIM OF THE ASSESSEE. 7. IN THIS CASE ALSO THE ASSESSEE HAS GIVEN THE F OLLOWING INFORMATION: 13 13 IN SO FAR AS THE QUESTION AS TO WHETHER PAYMENT MAD E BY MTAR TECHNOLOGIES P LTD. TO MTAR TECHNOLOGIES P LTD. UN LESS THE ASSESSEE IS A SHAREHOLDER IN THE COMPANY MAKING THE PAYMENT THE AMOUNT RECEIVED SHALL NOT BE TREATED AS INCOME WITHIN THE MEANING OF SEC.2(22) (E) OF THE IT ACT. THE ASSESSEE SUBMITS THAT THE A MENDED PROVISIONS OF SEC.2(22)(E) ARE EXPLAINED IN DETAIL BY THE CIRCULA R NO.495 DATED 22.9.1987 ISSUED BY THE CBDT REPORTED IN 168 ITR (S TATUTES) 87. IN THE SAID CIRCULAR THE INTENTION OF INTRODUCING CLAU SE (E) OF SUB SECTION (22) OF SEC. 2 IS MENTIONED. AN EXTRACT OF THE SAI D CIRCULAR IS GIVEN BELOW: WITH THE DELETION OF SEC. 104 TO 109 THERE WAS A LI KELIHOOD OF CLOSELY HELD COMPANIES NOT DISTRIBUTING THEIR PROFITS TO SH AREHOLDERS BY WAY OF DIVIDENDS BUT BY WAY OF LOANS OR ADVANCES SO THAT T HESE ARE NOT TAXED IN THE HANDS OF THE SHAREHOLDERS. TO FORESTALL THI S MANIPULATION SUB CLAUSE (E) CLAUSE (22) OF SEC. 2 HAS BEEN SUITABLY AMENDED. 5. IT CAN BE SEEN FROM THE CIRCULAR THAT THE PRO VISIONS OF AMENDED SECTION 2(22)(E) ARE TO BE APPLIED ONLY TO THE PAYM ENTS MADE TO THE SHAREHOLDERS AND NOT TO ANY OTHER PERSON OR CONCERN OTHER THAN SHAREHOLDERS. THE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. HK MITTAL REPORTED IN 219 ITR 420 HELD THAT THE CHIEF INGREDIENT OF DIVIDEND AS D EFINED IN SUB CLAUSE (E) OF CLAUSE (22) OF SEC.2 OF THE ACT IS THAT THE RECIPIE NT SHOULD BE A SHARE HOLDER ON THE DAY THE LOAN WAS ADVANCED. IF THAT FACT IS NOT ESTABLISHED THERE CANNOT BE A DEEMED DIVIDEND. THEREFORE THE PROVIS IONS OF SEC.2(22)(E) CANNOT BE APPLIED TO MARC AS IT IS NOT A SHAREHOLDE R IN MTAR TECHNOLOGIES P LTD. IN THIS REGARD THE ASSESSEE RELIES ON THE DE CISION OF THE ITAT MUMBAI BENCH G IN THE CASE OF SEAMIST PROPERTIES P LTD. VS. ITO REPORTED IN (2005) 1 SOT PAGE 142. THE ASSESSEE FURTHER SUBMITS THAT TH E PROVISIONS OF SEC. 2(22)(E) MENTION AS UNDER: ANY PAYMENT BY A COMPANY NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED OF ANY SUM (WHETHER A S REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) (MA DE AFTER THE 31 ST DAY OF MAY 1987 BY WAY OF ADVANCE OR LOAN TO A SHA REHOLDER BEING A PERSON WHO IS BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RI GHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PERCENT OF THE V OTING 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 T HIS CLAUSE REFERRED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COM PANY ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULA TED PROFITS. 6. THE INTENTION OF THE LEGISLATURE IS CLARIFIED IN CIRCULAR ISSUED BY THE CBDT AS AT THE TIME OF AMENDMENT OF CLAUSE (E) OF SUB SECTION (22) OF SEC.2 IS FURTHER FORTIFIED BY THE FACT THAT FOR DE DUCTION OF TAX AT SOURCE. SEC. 194 PROVIDE THAT SUCH DEDUCTION OF TAX HAS TO BE MA DE IN THE CASE OF THE PAYMENTS OF THE NATURE MENTIONED CLAUSE (A) (B) ( C ) (D) AND (E) OF SUB SECTION (22) OF SECTION 2 ONLY IN A CASE WHERE SUCH PAYMENTS WERE MADE TO A SHAREHOLDER. SEC.199 ALSO INDICATES THAT ADJUSTMEN T OF TDS WOULD BE PROVIDED IN THE ASSESSMENT OF SHAREHOLDER ONLY. TH E VERY FACT THAT THE PROVISION FOR DEDUCTION OF TAX AT SOURCE AND ADJUST MENT OF TAX IS ONLY IN RESPECT OF THE PAYMENTS TO THE SHAREHOLDER WOULD CL EARLY INDICATE THAT EVEN 14 14 AFTER THE AMENDMENT THE EFFECT OF CLAUSE (E) OF SU B SECTION (22) OF SEC.2 WOULD APPLY ONLY WHEN THE PAYMENT IS MADE TO A SHAR EHOLDER. WHEREVER THE TAX IS TO BE DEDUCTED AT SOURCE FROM A DIVIDEND OR DEEMED DIVIDEND AND THE CONSEQUENTIAL EFFECT OF GIVING EFFECT TO SUCH DEDUC TION OF TAX AT SOURCE ETC. REFERENCE WAS MADE ONLY TO THE PAYMENTS TO THE SHAR EHOLDER. THIS WOULD INDICATE CLEARLY THE CLAUSE (E) WOULD APPLY ONLY IN CASE OF PAYMENTS TO THE SHAREHOLDER AND NOT TO OTHERS. 7. BESIDES THE ABOVE EXPLANATION THE ASSESSEE ALS O SUBMITS THAT THE PROVISIONS OF IT ACT FOR DEDUCTION OF TAX AT SOURCE IN RESPECT OF THE DIVIDEND ARE CONTAINED IN SEC. 194 WHICH READS AS UNDER: DIVIDENDS: THE PRINCIPAL OFFICER OF AN INDIAN COM PANY OR A COMPANY WHICH HAS MADE THE PRESCRIBED ARRANGEMENTS FOR THE DECLAR ATION AND PAYMENT OF DIVIDENDS (INCLUDING DIVIDENDS ON PREFERENCE SHARES ) WITHIN INDIA SHALL BEFORE MAKING ANY PAYMENT IN CASH OR BEFORE ISSUING ANY CHEQUE OR WARRANT IN RESPECT OF ANY DIVIDEND OR BEFORE MAKING ANY DIS TRIBUTION OR PAYMENT TO A SHAREHOLDER WHO IS RESIDENT IN INDIA OF ANY DIVID END WITHIN THE MEANING OF SUB CLAUSE (A) OR SUB CLAUSE (B) OR SUB CLAUSE ( C) OR SUB CLAUSE (E) OR SUB CLAUSE (E) OF CLAUSE (22) OF SECTION 2 DEDUCT FROM THE AMOUNT OF SUCH DIVIDEND INCOME TAX AT THE RATES IN FORCE. 8. DEDUCTION HAS TO BE MADE IN TWO DIFFERENT SITUA TIONS NAMELY (A) BEFORE MAKING ANY PAYMENT IN CASH OR BEFORE ISSUING ANY CH EQUE OR WARRANT IN RESPECT OF DIVIDEND OR (B) BEFORE MAKING ANY DISTRI BUTION OR PAYMENT TO A SHARE HOLDER WHO IS A RESIDENT OF INDIA OF ANY DI VIDEND WITHIN THE MEANING OF CLAUSE (A) OR SUB CLAUSE (B) OR SUB CLAUSE ( C) OR SUB CLAUSE (E) OR SUB CLAUSE (E) OF CLAUSE (22) OF SECTION 2 OF THE IT AC T (THE WORDS SHARE HOLDER ARE RELEVANT FOR THE PURPOSE OF DETERMINING THE ISS UE UNDER CONSIDERATION). ON GOING THROUGH THE EXPLANATION OFFERED BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW AND ALSO CONSIDERING THE DECI SIONS RENDERED BY THE BOMBAY BENCHES OF THE TRIBUNAL IN THE AFORESAID CAS E WE FIND MUCH FORCE IN THE STAND TAKEN BY THE ASSESSEE. THE ISSUE UNDER C ONSIDERATION IS SQUARELY COVERED BY THE DECISIONS CITED ABOVE. CONSIDERING THE SAME WE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSE E AS IT IS NOT CONSIDERED AS DEEMED INCOME AND THE ASSESSEE CANNOT BE HELD TO BE THE ASSESSEE IN DEFAULT. IT IS ORDERED ACCORDINGLY. 8. IN THE RESULT THE APPEAL FILED BY THE ASSESSE E IS ALLOWED. 9. HE ALSO RELIED ON THE ORDER OF SPECIAL BENCH MUMBA I IN THE CASE OF ACIT VS. BHAUMIC COLOR (P) LTD. (118 ITD) (SB). FURTHER CONTENTION OF THE ASSESSEE COUNSEL IS THAT NO FUND HAS BEEN TRANSFERRED TO THE BENEFIT OF INDIVIDUAL SHARE HOLDERS AS SUCH THERE IS NO DEEMED DIVIDEND. HE RELIED ON THE JUDGEMENT IN THE CASE OF C IT VS. MUKUNDRAY K. SHAH (290 ITR 433) (SC). HE ALSO SUBMITTED THAT T HIS IS ONLY A TRADING RECEIPT. IN OUR OPINION DEEMED DIVIDEND COU LD BE ASSESSED ONLY 15 15 IN THE HANDS OF PERSON WHO IS SHARE HOLDER OF THE LEN DER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THAN THE SHARE HO LDER. THE PROVISIONS OF SEC.2(22)(E) DO NOT SPELL OUT AS TO WHETHER THE INCOME HAS TO BE TAXED IN THE HANDS OF SHARE HOLDER OR CONCERN (N ON- SHARE HOLDER). THE PROVISIONS ARE AMBIGUOUS. IT IS THEREFOR E NECESSARY TO EXAMINE THE INTENTION BEHIND ENACTING THE PROVISIONS O F SEC.2(22)(E). THE INTENTION BEHIND ENACTING PROVISIONS OF SEC.2(22) (E ) IS THAT CLOSELY HELD COMPANIES (I.E. COMPANIES IN WHICH PUBLICS ARE NOT SUB STANTIALLY INTERESTED) WHICH ARE CONTROLLED BY A GROUP OF SHARE HO LDERS EVEN THOUGH COMPANY HAS ACCUMULATED PROFITS WOULD NOT DISTRIBU TE SUCH PROFIT AS DIVIDEND BECAUSE IF SO DISTRIBUTED THE DIVIDEN D INCOME WOULD BECOME TAXABLE INCOME IN THE HANDS OF THE SHARE HOLDER S. INSTEAD OF DISTRIBUTING ACCUMULATED PROFIT AS DIVIDEND COMPANY DI STRIBUTE THEM AS LOANS OR ADVANCES TO SHARE HOLDERS OR TO CONCERN IN WHICH SUCH SHARE HOLDERS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT O N BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHARE HOLDERS. IN SU CH AN EVENT BY THE DEEMING PROVISIONS SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF SEC.2 (22)(E) IS TO TAX DIVIDEND IN THE HANDS OF SHARE HOLDERS. THE DEEMING PROVISION AS IT APPLIES IN THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH ITS SHARE HOLDERS HAS SUBSTANTIAL INTEREST IS BASED O N THE PRESUMPTIONS THAT THE LOANS OR ADVANCES WOULD ULTIMATEL Y BE MADE AVAILABLE TO THE SHARE HOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCES. THE INTENTION OF THE LEGISLATURE IS THEREFOR E TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF THE CONCERN. THE BASIS OF BRINGING IN THE AMENDMENT TO S .2(22)(E) BY THE FIANC ACT 1987 W.E.F. 1 ST APRIL 1988 IS TO ENSURE THAT PERSONS WHO CONTROL THE AFFAIRS OF A COMPANY AS WELL AS THAT OF A F IRM CAN HAVE THE PAYMENT MADE TO A CONCERN FROM THE COMPANY AND THE PE RSON WHO CAN CONTROL THE AFFAIRS OF THE CONCERN CAN DRAW THE SAME FROM THE CONCERN INSTEAD OF THE COMPANY DIRECTLY MAKING PAYMENT TO THE SHAREHOLDER AS 16 16 DIVIDEND. THE SOURCE OF POWER TO CONTROL THE AFFAIRS O F THE CONCERN CAN DRAW THE SAME FROM THE CONCERN INSTEAD OF THE COMPANY DI RECTLY. IT IS THEREFORE PROPER TO CONSTRUE THOSE PROVISIONS AS CONTEMPLA TING A CHARGE TO TAX IN THE HANDS OF THE SHARE HOLDER AND NOT IN THE HANDS NON SHARE HOLDER I.E. MMPL. A LOAN OR ADVANCE RECEIVED BY MMPL IS NOT IN THE NATURE OF INCOME. IN OTHER WORDS THERE IS A DEEMED A CCRUAL OF INCOME ONLY IN THE HANDS SHARE HOLDERS NOT IN THE HANDS OF N ON SHARE HOLDERS I.E. MMPL. THE RECEIPT OR DEEMED RECEIPT SHOULD BE IN THE NATURE OF INCOME. THEREFORE THE DEEMING FICTION CAN BE APPLIED ONLY IN THE HANDS OF SHARE HOLDERS AND NOT IN THE HANDS OF NON SHARE HOLD ERS. FURTHER THE CBDT CIRCULAR NO.495 DT. 22.9.1987 TO THE EXTENT NOT BENEVOLENT IS NOT BINDING. IN THE EVENT OF THE PAYMENT OF LOAN OR AD VANCE BY A COMPANY TO A CONCERN BEING TREATED AS DIVIDEND AND TAXED IN TH E HANDS OF THE CONCERN THEN THE BENEFIT OF SET OFF U/S 2(22) (E) (II I) CANNOT BE ALLOWED TO THAT CONCERN BECAUSE THE CONCERN CAN NEVER RECEIVE ANY DIVIDEND FROM THE COMPANY WHICH IS ONLY PAYING TO THE SHAREHOLDE R WHO HAS SUBSTANTIAL INTEREST IN THE COMPANY. THE PROVISIONS OF S UB CLAUSE (III) OF S.2(22) (E) ALSO THEREFORE CONTEMPLATE DEEMED DIVIDE ND BEING TAXED IN THE HANDS OF SHAREHOLDER ONLY. THE VIEW HAS BEEN TAK EN BY COORDINATE BENCH IN THE CASE CITED SUPRA. 10. WE ARE OF THE OPINION THAT PAYMENT OR ADVANCES TO NON SHARE HOLDERS DOES NOT REQUIRE TDS U/S 194 AND ASSESSEE CAN NOT BE HELD TO BE DEFAULT U/S 201 SO AS TO ATTRACT INTEREST U/S 201(1A) OF THE IT ACT. IT IS TO BE NOTED THAT U/S PROVISIONS OF COMPANY A CT EVERY COMPANY IS EXPECTED TO MAINTAIN A REGISTER OF SHARE HOLD ER U/S 150 OF THE COMPANY ACT. COMPANIES IS NOT OBLIGED TO MAINTAIN ANY REGISTER WHEREIN DETAILS OF SUCH CONCERNS MAY BE MAINTAINED TO WH ICH PROVISIONS OF SEC.2(22)(E) OF THE IT ACT APPLY. UNDER THESE CIRCUM STANCES WHEN PAYMENT IS MADE TO A NON SHARE HOLDER IT IS IMPOSSIBLE FOR THE PAYER COMPANY TO ASCERTAIN WHETHER IT WILL ATTRACT THE PROVISI ONS OF 17 17 SEC.2(22)(E) OF THE IT ACT OR NOT. THEREFORE IN THI S VIEW OF THE MATTER LAW DOES NOT EXPECT THE PAYER COMPANY TO DEDUCT TDS WH EN PAYMENT IS MADE TO A NON SHARE HOLDER. THIS IS THE REASON THE LA W EXPRESSLY PROVIDES FOR TDS REQUIREMENTS ONLY WHEN PAYMENT IS MAD E TO SHARE HOLDER. THUS SEC.194 REQUIRES TDS ONLY WHEN PAYMENT IS MADE TO THE SHARE HOLDER. PAYMENTS TO A SHAREHOLDER WILL COVER BOT H AS DIVIDENDS NORMAL DIVIDED AS WELL AS DEEMED DIVIDEND. OTHERWISE ALSO DEEMED DIVIDEND WILL BE TAXED IN THE HANDS OF THE SHARE HOLD ERS AND NOT IN THE HANDS OF NON SHARE HOLDERS PAYEE. THEREFORE SEC.194 DO ES NOT REQUIRE TDS WHEN PAYMENT IS MADE TO NON SHAREHOLDERS. ALSO U/ S 206 THE COMPANY ACT 1956 THE DIVIDEND CAN BE PAID A REGISTERE D SHARE HOLDER ONLY. THEREFORE SEC.194 OF THE ACT IS SYNCHRONIZED WIT H THE REQUIREMENTS OF COMPANIES ACT 1956 CONTAINING SECTIONS 1 50 AND 206 OF THE COMPANIES ACT. ACCORDINGLY IN OUR OPINION THE IMPUGNED AMOUNT CANNOT BE AS DEEMED INCOME IN THE HANDS OF RECIPIENT BE ING SO THE PROVISIONS OF SEC.194 IS NOT APPLICABLE. CONSEQUENTLY TH E PROVISIONS OF SEC. 201 AND 201(1A) CANNOT BE APPLIED. 11. THE ASSESSEE ALSO RAISED A NOTE THAT THE PAYMENTS AR E MADE TOWARDS SUPPLIES IN ORDINARY COURSE OF BUSINESS. U/S 2(22) (E) ONLY THE PAYMENTS MADE BY A COMPANY BY WAY OF ADVANCE OR LOAN T O A SHARE HOLDER ALONE IS TO BE CONSIDERED FOR THE PURPOSE OF DEE MED DIVIDEND. PAYMENT MADE BY A COMPANY THROUGH A RUNNING ACCOUNT IN DISCHARGE OF ITS EXISTING DEBTS OR AGAINST PURCHASE OR FOR AVAILING SERVICES SUCH PAYMENTS MADE IN THE ORDINARY COURSE OF BUSINESS CARRIED O N BY BOTH THE PARTIES COULD NOT BE TREATED AS DEEMED DIVIDEND F OR THE PURPOSE OF S.2(22) (E). THE LAW DOES NOT PROHIBIT BUSINESS TRANSA CTION BETWEEN RELATED PARTIES AND THEREFORE PAYMENT MADE IN ORDIN ARY COURSE OF BUSINESS CANNOT BE TREATED AS LOANS AND ADVANCES. THEREFOR E PAYMENT MADE BY A COMPANY IN THE COURSE OF CARRYING OF HIS REGUL AR BUSINESS 18 18 THROUGH A MUTUAL OPEN TO A RELATED PARTY DO NOT COM E UNDER THE PURVIEW OF SEC. 2(22) (E). 11.1. THE DEPARTMENTAL REPRESENTATIVE STRONGLY REL IED ON THE ORDER OF TRIBUNAL HYDERABAD IN THE CASE OF HYDERABAD CHEMICAL PRODUCTS VS. ITO (ITAT B BENCH (HYD.) (72 ITD 323). SINCE WE HAVE FOLLOWED THE ORDER OF THE SPECIAL BENCH MUMBAI WE AR E DECLINED TO AGREE WITH ARGUMENTS WITH THE DEPARTMENTAL REPRESENTA TIVE WITH REGARD TO ORDER OF HYDERABAD BENCH. 11.2. THE DEPARTMENTAL REPRESENTATIVE ALSO RELIE D ON JUDGEMENT OF SUPREME COURT IN THE CASE OF CIT VS. MUNDRAY K. SHA H (290 ITR 433) (SC). IN THE CASE BEFORE THE SUPREME COURT COMP ANY M/S MKSEPL IN WHICH ASSESSEE HAD SUBSTANTIAL INTEREST AND WHICH HAD ACCUMULATED PROFIT ADVANCED MONEY TO TWO CLOSELY RELATED PARTNERSHIP FIRMS IN WHICH ALSO ASSESSEE WAS A PARTNER WHICH AMOUNTS WE RE WITHDRAWN BY ASSESSEE AND UTILIZED FOR PURCHASE OF RBI BO NDS THE AMOUNTS WERE ADVANCED BY MKSEPL FOR THE BENEFIT OF TH E ASSESSEE BY USING THE TWO FIRMS AS CONDUCE AND THE SAID AMOUNT WAS RIG HTLY ASSESSED AS DEEMED DIVIDEND. HOWEVER IN THE CASE BEFORE U S THERE IS NO FINDINGS BY THE LOWER AUTHORITIES THAT THE COMMON D IRECTORS WITHDRAWN ANY AMOUNT FROM THE RECEIPTS COMPANIES FOR TH EIR PERSONAL BENEFIT. AS SUCH THE RATIO LAID DOWN BY THE HONBLE S UPREME COURT CANNOT BE APPLIED TO THE FACTS OF PRESENT CASE. 12. NOW COMING TO THE FACT OF COMPUTATION OF ACCUMULAT ED PROFIT SINCE WE HAVE HELD THAT IN THE PRESENT CASE TH ERE IS NO QUESTION APPLICATION OF PROVISIONS OF S.2(22) (E) CONSEQUENTLY THERE IS NO QUESTION OF COMPUTATION OF ACCUMULATED PROFIT. IN VI EW OF THIS ALL THE THREE REVENUE APPEALS BECOME INFRUCTUOUS. 19 19 13. NOW THERE IS ONE MORE APPEAL OF THE ASSESSEE IN IT A NO.787/HYD/2009. THIS ISSUE ALREADY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL DATED 31.8.2009 FOR TH E ASSESSMENT YEAR 2004-05CITED IN PARA . RESPECTFULLY FOLLOWING THE R ATIO LAID DOWN BY THE TRIBUNAL IN THE SAID ORDER ON THE SAME REASON WE ALLOW THE APPEAL OF THE ASSESSEE. ACCORDINGLY THE APPEAL OF THE ASSESSEE AL LOWED. 14. IN THE RESULT ALL THE ASSESSEE APPEALS ARE ALLOWED AND REVENUE APPEALS ARE DISMISSED AS INFRUCTUOUS. ORDER PRONOUNCED IN THE OPEN COURT 13 TH APRIL 2010 SD/- SD/- G.C. GUPTA CHANDRA POOJARI VICE PRESIDENT ACCOUNTANT MEMBER DATED THE 13 TH APRIL 2010 COPY FORWARDED TO: 1. SHRI K. VASANT KUMAR 102 TARAMANDAL COMPLEX SA IFABAD HYDERABAD. 2. THE DCIT CIRCLE 16(2) HYD & ACIT CIRCLE 14(2) ( TDS) HYDERABAD 3. CIT(A)-II V VI HYDERABAD. 4. CIT HYDERABAD 5. THE D.R. ITAT HYDERABAD. NP