IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : B : NEW DELHI
BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT
AND
SHRI A.D. JAIN, JUDICIAL MEMBER
ITA Nos.2119 & 1359/Del/2013
Assessment Years : 2008-09 & 2009-10
DCIT, Vs. Falcon Business Resources (P) Ltd.,
Circle 11 (1), Room No.312, D-158B, Okhla Indl. Area,
CR Building, Phase I,
New Delhi. New Delhi.
PAN : AAACF8295M
(Appellant) (Respondent)
Assessee By : Shri Hardipender Singh,
Advocate
Department By : Smt. Nidhi Srivastava, Sr. DR
ORDER
PER A.D. JAIN, JUDICIAL MEMBER:
These are Department's appeals for Assessment Years 2008-09 and
2009-10, respectively, against the action of the ld. CIT (A) in deleting the
addition of ` 32 lac (for Assessment Year 2008-09) and ` 20 lac (for
Assessment Year 2009-10), made on account of deemed dividend income u/s
2 (22) (e) of the IT Act. The facts in both these cases being, mutatis mutandis
exactly similar, both these appeals are being disposed of by this composite
order. The facts, for facility, are being taken from ITA No.2119/Del/2013.
ITA Nos.2119 & 1359/Del/2013
2. The Assessing Officer found the assessee company to have received
loans of ` 32 lacs and ` 20 lacs from M/s Shivalik Dairies Pvt. Ltd. in both
these years. The Assessing Officer observed that since the major
shareholders of the assessee company, i.e., S/Shri Devendra Dhawan, Neeraj
Dhawan and Suraj Dhawan, etc., are interested in M/s Shivalik Dairies Pvt.
Ltd., the loans received by the assessee company are deemed income of the
assessee as per the provisions of Section 2 (22) (e) of the Act, since loans
received from a private limited company by a concern, whose partners are
interested in the private limited company, are deemed to be the income of
the receiver concern as per the provisions of Section 2 (22)(e) of the Act. By
virtue of the impugned orders, the Ld. CIT (A) deleted the additions made by
the Assessing Officer for both the years under consideration.
3. Challenging the impugned orders, the Ld. DR has contended that the
Ld. CIT (A) has erred in deleting the additions correctly made by the
Assessing Officer; that while doing so, the Ld. CIT (A) has failed to take into
consideration the fact that as rightly observed by the Assessing Officer,
Finance Act, 1987, has changed the definition of `deemed dividend' u/s 2
(22) (e) of the Act and thereby, any sum by way of advance or loan to any
concern in which a shareholder, being a person who is the beneficial owner
of the share holding not less than 10% of the voting power of a company, is
a member or a partner and in which, he has a substantial interest; that it
eluded the Ld. CIT (A) that the Finance Act, 1987, as such, has brought in an
additional category of receipt of loan or advance from a company and this
additional category, as correctly observed by the Assessing Officer
represents a concern, wherein, the shareholder is a partner or a member and
in which, he has a substantial interest; that the Ld. CIT (A) has also failed to
consider the observation of the Assessing Officer that the word `concern' has
been defined in Explanation 3 to Section 2 (22) (e) of the Act as an HUF or a
firm or an AOP or a body of individuals or a company and that according to
this provision, a person has substantial interest in a concern, if he is entitled
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ITA Nos.2119 & 1359/Del/2013
to at least 20% of its profits; that since in the present case, all the conditions
prescribed by such Section 2 (22) (e) of the Act are satisfied, the Assessing
Officer had correctly treated the loans received by the assessee from M/s
Shivalik Dairies Pvt. Ltd. as deemed dividend of the assessee company.
4. The ld. Counsel for the assessee, on the other hand, has placed strong
reliance on the impugned orders. It has been contended that the orders
passed by the Ld. CIT (A) are well reasoned elaborate speaking orders,
requiring no interference at our hands; that the loans were advanced by M/s
Shivalik Dairies Pvt. Ltd. in the ordinary course of its business; that the
lending of money was a substantial part of the business of the said lending
company; that to attract Section 2 (22) (e) of the Act, the payment must be
made to the person who is a registered holder of shares and the shareholder
alone, as held in `CIT vs. Bhopal Clothing Company Pvt. Ltd.', 350 ITR 67
(Del); that all these aspects have duly been taken into consideration by the
Ld. CIT (A) while rightly deleting the additions wrongly made by the
Assessing Officer for both the years under consideration; and that therefore,
there being no merit therein both the appeals of the department be
dismissed.
5. We have heard the parties and have perused the material on record. It
remains undisputed that the loans were advanced to the assessee by M/s
Shivalik Dairies Pvt. Ltd. in the ordinary course of its business and that
lending of money was a substantial part of the business of Shivalik Dairies
Pvt. Ltd. The Profit & Loss Account of the lending company, a copy whereof
has been placed on record, shows that there is 100% income from lending
money and there is no other business activity from FY 2007-08 to FY 2010-
11. As per the Memorandum and Articles of Association of Shivalik Dairies,
one of its main objects was to carry on the business to manufacturers,
producers and processors of and dealers in milk and milk products and milk
preparations of all kinds. The Minutes of the Meeting of the Board of
Directors of Shivalik Dairies, held on 6.4.06 (APB Assessment Year 2008-09,
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ITA Nos.2119 & 1359/Del/2013
pages 55-56) shows that the aforesaid main objects of the company could
not be carried out despite land having been purchased for establishing a milk
plant and installation of related machinery. Approvals from the concerned
Government department could not be obtained and so, the project could not
be started. The source of income of the company had been the sale of some
agricultural produce. The land of the company came under compulsory
acquisition by the Government of Delhi. Even the possession thereof was
taken over. The company had neither any land, nor any fixed assets.
Accordingly, the Memorandum of Association of the company was decided to
be amended and the company was authorized to lend money to outside
parties. Further, by virtue of the Minutes of the meeting dated 11.3.07 (APB
for Assessment Year 2008-09, pages 57-58), it was decided that interest @
15% be paid to the company, if loans were granted in favour of the assessee
company. Then, vide Minutes of the Meeting dated 18.03.2007 (APB for
2008-09, page 59), it was, inter alia, resolved that a loan of ` 30 lacs @ 15%
interest per annum be granted to the assessee company. This loan was
formalized by virtue of the agreement dated 24.03.07 (APB for Assessment
Year 2008-09, pages 60-61).
6. All the above facts were not taken into consideration by the Assessing
Officer while passing the assessment orders. The assessment orders do not
contain any reference to them. The Assessing Officer, thus, went entirely
wrong in observing that the interest income of M/s Shivalik Dairies was a part
of about 0.02% of gross receipt.
7. In `CIT vs. V.S. Shiva Subramaniam', 141 CTR Madras 34, it has been
held that where the assessee was a shareholder in a company doing only
money lending business, the loan taken by the assessee could not be treated
as deemed dividend, even though the company had accumulated profits.
Further, in `CIT vs. Parley Plastics Ltd. and Another', 332 ITR 63 (Bom), it has
been held that as per Section 2 (22) (e) of the Act, any advance or loan
made by a company to a shareholder or a concern in which the shareholder
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ITA Nos.2119 & 1359/Del/2013
has a substantial interest would not be regarded as a dividend, if the
advance or loan was made by the lending company in the ordinary course of
its business and that the lending of the money was a substantial part of the
business of the lending company. Both these conditions are satisfied in the
present case.
8. Further, in `CIT vs. Gopal Clothing Company Pvt. Ltd.' (supra), it was
held that in order to attract the provisions of Section 2 (22) (e) of the Act,
payment must be made to the person who is a registered holder of shares
and the shareholder along and that the facts that the shareholders of the
assessee company were also shareholders of the lending company, was not
sufficient and did not meet the requirement of Section 2 (22) (e) of the Act.
9. In `CIT vs. MCC Marketing (P) Ltd., 343 ITR 350 (Del), it was held that
the assessee company, who was not a shareholder of the company from
which it had received a loan or an advance, could not be treated as covered
by the definition of the word `dividend', as contained in Section 2 (22) (e) of
the Act.
10. In `MCC Marketing (P) Ltd.' (supra), the Hon'ble High Court of Delhi has
followed `CIT vs. Ankitech (P) Ltd.', 199 Taxmann 341 (Del), which has rightly
been followed by the Ld. CIT (A) in favour of the assessee and wherein, it
was held that the legal fiction created u/s 2 (22 ) (e) of the Act enlarges the
definition of `dividend' only, that the legal fiction is not to be extended
further by broadening the concept of shareholders, that any company is
supposed to distribute profits in the form of dividend to its
shareholders/members and such dividend cannot be given to non-members,
that the second category specified in Section 2 (22) (e) is a concern in which
a shareholder of the payer company has at least 20% of voting power and
loan or advance under this category is given admittedly not to a
shareholder/member of the payer company and, therefore, it cannot be
treated as shareholder/member receiving dividend and that where loans or
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ITA Nos.2119 & 1359/Del/2013
advances are given in the normal course of the business and the transaction
in question benefits both the payer and the payee companies, the provisions
of Section 2 (22) (e) cannot be invoked.
11. In the impugned orders, we find that the Ld. CIT (A) has duly
considered the above position on both the aspects and has found that the
loans were advanced in the regular course of business of the lending
company. The relevant portion of the CIT (A)'s order for Assessment Year
2008-09 reads as follows:-
"I have considered the submission of the appellant and observation of
the Assessing Officer. It is seen that appellant company had received
Rs.32,00,000/from Mis Shivalik Dairies Pvt. Ltd. as loan during the
year. This loan has been received in the regular course of its business.
It is seen that M/s Shivalik Dairies Pvt. Ltd. is engaged in the business
of money lending from April 2006, for this, the appellant has filed
copies of the minutes approved by the Board of Directors in April 2006
and 11.03.2007. Copies of the minutes are filed in the paper book as
Annexure-(ii) and (iii) of the submission. In these minutes the business
of the company was changed from Dairies to investment in FDRs, loans
to the parties, companies, financial institutions and investment in
stock. The appellant has also filed copy of memorandum of association
whereby company was permitted to lend and advance money or give
credit to persons, firms or companies. The appellant has filed copy of
memorandum of association in the submission as Annexure-(i) to the
submission. The purpose of advancing money has been listed at S. No.
17 of the MOD. The appellant has also filed copy of accounts of M/s
Shivalik Dairies Pvt. Ltd. wherein the receipt of the interest has been
disclosed by M/s Shivalik Dairies Pvt. Ltd. in its profit and loss account.
During the F.Y. 2007-08, the appellant company has paid interest of
Rs.7,38,082/-to M/s Shivalik Dairies Pvt. Ltd. as interest on the money
taken as loan. It is also seen from the details filed by the appellant that
M/s Shivalik Dairies Pvt. Ltd. has earned income by way of interest
from lending of money of Rs.l9,95,167/-during the year. M/s Shivalik
Dairies" Pvt. Ltd has income from interest and there is no other income
in its profit and loss account. All these facts established that loan or
advance was made by Mis Shivalik Dairies Pvt. Ltd. to the appellant
company in the ordinary course of its business. It is also seen that
lending of money was substantial part of the business of M/s Shivalik
Dairies Pvt. Ltd.
The provisions of section 2(22)( e) excludes such transactions from the
purview of deemed dividend. The relevant portion of section 2(22)( e)
is reproduced hereunder:-
Section 2(22)(e)
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ITA Nos.2119 & 1359/Del/2013
Any payment by a company, no being a company in which the public
are substantially interested of any sum .......
but "dividend" does not include --
(i) .
(i)(a) .
(ii) any advance or loan made to a share holder (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.
The above provision clearly excludes the transactions of loans or
advance by a company who is engaged in the business of lending
money in the ordinary course of its business. Since the money
advanced to the appellant company of Rs.32,00,000/- by M/s Shivalik
Dairies Pvt. Ltd. was given on interest in the ordinary course of its
business and for that interest of Rs.7,38,082/-has been charged from
the appellant company. Therefore, the transaction of loan of
Rs.32,00,000/- is not covered under section 2(22)(e) of the IT Act and
same cannot be taxed as deemed dividend. Hence, the addition made
by the Assessing Officer of deemed dividend of Rs.32,00,000/- is
deleted.
In this regard reliance is placed on Hon'ble Delhi High Court judgments
in the case of Ankitech Pvt. Ltd. 199 Taxman 341 wherein "it is held
that loans and advances given in the normal course of business and
transaction in question benefits both payer and payee company,
therefore, the provisions of section 2(22)(e) cannot be invoked."
............................................................................................................
..........................................................................................................
Reliance is also placed on the Hon'ble Delhi High Court judgment in the
case of Raj Kumar reported in 318 ITR 462 wherein it is held that trade
advances which are in the nature of money transacted to give effect to
the commercial transactions, cannot be treated as deemed dividend
falling with the ambit of section 2 (22) (e)."
............................................................................................................
..........................................................................................................
"Further reliance is placed on the judgment of Hon'ble Delhi High Court
in the case of CIT vs. Creative Dyeing & Printing Pvt. Ltd. 318 ITR 476
(Del)....."
............................................................................................................
...........................................................................................................
In view of the factual and legal position discussed above it becomes
obvious that amount of loan of Rs.32,00,000/- from M/s Shivalik Dairies
Pvt. Ltd. by the appellant was loan in the ordinary course of business
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ITA Nos.2119 & 1359/Del/2013
and for that interest has been charged during the year and in
subsequent years. The surrounding circumstances of the amount
received and paid suggest that the amount received was to give effect
to the business or commercial transaction between the appellant
company and M/s Shivalik Dairies Pvt. Ltd. The receipt and payment of
money to give effect commercial transactions does not fall within the
definition of the deemed dividend u/s 2(22)(e) of the IT Act. Hence the
addition made by the Assessing Officer of Rs.32,00,000/- as deemed
dividend is deleted."
12. The Department has not been able to counter the aforesaid
observations of the Ld. CIT (A), with which, we find ourselves ad idem.
13. In view of the above, finding no merit therein, the grievance sought to
be raised by the department for both the years under consideration is
rejected.
14. In the result, both the appeals filed by the department are dismissed.
The order pronounced in the open court on 04.04.2014.
Sd/- Sd/-
[G.D. AGRAWAL] [A.D. JAIN]
VICE PRESIDENT JUDICIAL MEMBER
Dated, 4th April, 2014.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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