JAMMU & KASHMIR HIGH COURT

I.T.A. Nos. 196 of 2013 and 16 of 2013.

VIRENDER SINGH AND ALI MOHAMMAD MAGREY, JJ.

Mrs. Aruna Thakur, Advocate fro the appellant.
Piyush Kaushik, Advocate, for the respondent.

JUDGMENT

Since in both the appeals, identical issue(s) is involved, as such, taken together for consideration.

I. T. A. No. 196 of 2013 relates to the assessment year 2003-04 of the respondent ("the assessee" for short) ; whereas I. T. A. No. 16 of 2013 relates to the assessment year 2004-05.

For the assessment year 2003-04, the assessee declared a loss of Rs. 1,60,28,165 and a return was filed in this regard on November 27, 2003, accompanied with copies of balance-sheet, trading account, profit and loss account and other statements including the report of the auditors in Form No. 3CD. The return was processed under section 143(1) of the Income-tax Act. During the assessment proceedings under section 143(3) in the case of M/s. G. I. Power Corporation Ltd., 77 Kali Jani, Jammu, for the assessment year 2007-08 (a sister concern of the assessee-company), it revealed that unsecured loan received as intercorporate deposits from M/s. Joint Investment Ltd. (another sister concern of the assessee-company) is covered under section 2(22)(e) of the Income-tax Act, as such, assessed as deemed dividend. It also gathered during the assessment proceedings that the assessee also belongs to the same group of companies and fulfils the conditions of section 2(22)(e) of the Income-tax Act for the intercorporate deposit received by it. The assessee-company has taken loan of Rs. 9,66,39,961 from the aforesaid M/s. G. I. Power Corporation Ltd., during the year under consideration. Since there is common shareholder, i.e., Sh. Anil Nanda having 23.08 per cent. shareholding in M/s. GTZ Securities Ltd. and 27.95 per cent. shareholding in M/s. G. I. Power Corporation Ltd., has reserve and surplus of Rs. 17,26,96,908 as on March 31, 2003, all the conditions necessary for assessing deemed dividend under section 2(22)(e) in the hands of assessee-company were fulfilled. Accordingly, notice under section 148 of the Income-tax Act was issued to the assessee, which was duly responded to. Thereafter, a questionnaire was issued to the assessee to show cause, why not loan of Rs. 9,66,39,961 received during the year from M/s. G. I. Power Corporation be treated as deemed dividend under section 2(22)(e) of the Income-tax Act and ultimately considering all the pleas of the assessee, the loan given by the M/s. G. I. Power Corporation for an amount of Rs. 9,66,39,961 was treated as deemed dividend under section 2(22)(e) of the Income-tax Act, which was assessed as income from other sources. Resultantly, gross tax demand of Rs. 5,38,54,951 was made from the assessee after computing the income and penalty proceedings under section 271(1)(c) of the Income-tax Act were also initiated, vide order dated December 30, 2010, aggrieved thereof, the assessee filed an appeal before the Commissioner of Income-tax (Appeals), Jammu, which was allowed, vide order dated September 29, 2011. The Revenue being aggrieved of the said order, filed an appeal before the learned Income-tax Appellate Tribunal, which stands dismissed, vide the impugned order dated July 22, 2012, holding that the issue involved has already been adjudicated upon and decided by the jurisdictional High Court (High Court of Punjab and Haryana) in case of CIT v. Sharman Woolen Mills Ltd. reported in 2011-TIOL-639-HC-P&H-IT on September 28, 2011. Hence, I. T. A. No. 196 of 2013 by the Revenue.

With regard to the assessment year 2004-05, the original return declaring a loss of Rs. 35,54,222 was filed by the assessee, which was also processed under section 143(1) of the Income-tax Act and ultimately notice under section 148 of the Income-tax Act was issued to the assessee, to which, reply was filed in which a specific plea was taken by the assessee that the assessee-company is not the shareholder of M/s. G. I. Power Corporation, as such, section 2(22)(e) of the Income-tax Act is not attracted. Another objection was also raised by the assessee regarding reopening of the assessment proceeding. However, the Department did not accept the plea(s) of the assessee and treated an amount of Rs. 8,61,75,000 as deemed dividend under section 2(22)(e) of the Income-tax Act in the hands of the assessee and after computing the income of the assessee, made a gross tax demand of Rs. 5,91,63,858. Penalty proceedings under section 271(1)(c) of the Income-tax Act were also initiated. Aggrieved of the said order, the assessee filed an appeal before the Commissioner of Income-tax (Appeals), Jammu, which was allowed on May 7, 2012, which constrained the Revenue to file an appeal before the learned Income-tax Appellate Tribunal, which now stands dismissed, vide order dated October 17, 2012, solely on the ground that the issue in dispute has already been decided by the Income-tax Appellate Tribunal in favour of the assessee in the assessee's own case for the assessment year 2003-04 following the order of the High Court of Punjab and Haryana in Sharman's case (supra). Hence, I. T. A. No. 16 of 2013.

While assailing the impugned orders of the Income-tax Appellate Tribunal in both the appeals, the Revenue has sought the following substantial questions of law :

In I. T. A. No. 196 of 2013
"(i) Whether, on the facts and in law, the learned Income-tax Appellate Tribunal, Amritsar, was right in dismissing the appeal filed by the Department and upholding the order of the Commissioner of Income-tax (Appeals) deleting the addition of Rs. 9,66,39,961 made under section 2(22)(e) of the Act ?

(ii) Whether, on the facts and in law, the learned Income-tax Appellate Tribunal was right in dismissing the appeal of the Department and upholding the order of the Commissioner of Income-tax (Appeals) in deleting the addition made under section 2(22)(e) of the Act ignoring the fact that the provisions of section 2(22)(e) were fulfilled ?

(iii) Whether the judgment relied upon by the learned Income-tax Appellate Tribunal was applicable in the facts and circumstances of the case in hand, particularly when the positive case of the appellants was that the assessee was a shareholder in the company ?"

In I.T.A. No. 16 of 2013

"(i) Whether the learned Income-tax Appellate Tribunal, Amritsar, was right in dismissing the appeal filed by the appellant by relying upon the judgment passed by the hon'ble High Court of Punjab and Haryana in the case titled CIT v. Sharman Woollen Mills Ltd. reported in 2011-TIOL-639-HC-P&H-IT and held that the loan advanced to a assessee company cannot be treated as dividend in terms of section 2(22)(e) of the Act ?

(ii) Whether the judgment relied upon by the learned Income-tax Appellate Tribunal was applicable in the facts and circumstances of the case in hand, particularly when the positive case of the appellants was that there was a common shareholder holding more than 10 per cent. share in both the companies ?"

(iii) Whether the Income-tax Appellate Tribunal was right in interpreting the provisions of section 2(22)(e) of the Act ?"

Mrs. Thakur, learned counsel for the appellant-Revenue, vehemently contended that the Income-tax Appellate Tribunal has failed to appreciate that the unsecured loan advanced by M/s. G. I. Power Corporation to the assessee (M/s. GTZ Securities Ltd.), in fact, was deemed dividend as shareholder of the lending company and the assessee-company were the same. Since the common shareholder was holding 10 per cent. share in both the companies, therefore, unsecured loan advanced by the lending company to the assessee has attracted the provisions of section 2(22)(e) of the Incometax Act.

Mrs. Thakur contends that the ratio of Sharman's case (supra) is not applicable to the facts of the present case, as such, the Income-tax Appellate Tribunal was not right in dismissing the appeal of the Revenue for both the assessment years.

Per contra, Mr. Kaushik, appearing for the assessee, submits that any loan or advance received by an assessee from an entity in a situation of having common shareholder between the assessee and the entity giving loan or advance is to be taxable as a "deemed dividend" under section 2(22)(e) only in the hands of a registered shareholder of the lending entity and not in the hands of an assessee, who is not a registered shareholder of the lending entity. Learned counsel submitted that on the facts of the present case, it is an undisputed position that the assessee is not a shareholder in the lending entity, viz., G. I. Power Corporation Ltd.

Mr. Kaushik submits that this legal position has been authoritatively confirmed by the apex court in CIT v. C. P. Sarathy Mudaliar [1972] 83 ITR 170 (SC) and while following the ratio of this judgment, the Delhi High Court in a batch of various appeals in the case of CIT v. Ankitech (P.) Ltd. reported in [2012] 340 ITR 14 (Delhi) has gone into comprehensive examination of the issue and the intention behind the provisions of section 2(22)(e). He draws our attention to paragraphs 24 and 25 of Ankitech's case (supra), which are as follows (page 34) :

"The intention behind enacting the 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.

Further, it is an admitted case that under the 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 a 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 a 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."

Mr. Kaushik further submits that as per another decision of the hon'ble the Supreme Court in the case of Rameshwarlal Sanwarmal v. CIT [1980] 122 ITR 1 (SC), it is only where a loan is advanced by the company to a registered shareholder that the amount of loan would be liable to be regarded as "deemed dividend" and the loan granted to a beneficial owner of the shares, who is not a registered shareholder cannot be subject to tax as "deemed dividend".

Mr. Kaushik, in support of his submissions, has relied upon the following judgments of other High Courts as well :

"I. CIT v. Universal Medicare (P.) Ltd. [2010] 324 ITR 263 (Bom) ;
II. CIT v. Khandelwal Associates reported in 2012-TIOL-752-HC-All (decision of the Allahabad High Court) ; and

III. CIT v. Hotel Hilltop [2009] 313 ITR 116 (Raj)."

Mr. Kaushik, thus, submits that the decision of the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal on the issue is sustainable in the eye of law and no substantial question of law arises from the same for adjudication in the appeals on hand.

We are not inclined to accept the argument of Mrs. Thakur for the reason that when the case of the assessee for the assessment year 2003-04 landed before learned Tribunal, counsel for both the Revenue and the assessee conceded that the issue involved in the appeal has already been adjudicated upon and decided by the hon'ble High Court of Punjab and Haryana in Sharman's case (supra), wherein it has been held that loan advanced to the assessee-company cannot be treated as dividend in terms of section 2(22) (3) of the Income-tax Act, if the assessee is not a shareholder of the lending company. It would be apt to reproduce the relevant paragraph from the impugned order dated July 27, 2012, and it reads :

         "3. At the time of hearing both the parties conceded that the issue involved in the present appeal has already been adjudicated and decided by the hon'ble High Court of Punjab and Haryana in the case of CIT v. Sharman Woollen Mills Ltd. reported in 2011-TI0L-639HC-P&H-IT on September 28, 2011. The hon'ble jurisdictional High Court, has held that the loan advanced to the assessee-company cannot be treated as dividend in terms of section 2(22)(e) of the Act, if the assessee is not a shareholder of the lending company."

So far as the assessment year 2004-05 is concerned, the learned Tribunal, while dismissing the appeal of the Revenue, simply took note of the fact that the issue in dispute already stands decided by the learned Tribunal in favour of the assessee's in his own assessment year 2003-04.

That apart, the judgments on which Mr. Kaushik, learned counsel for the assessee, is relying, are squarely applicable on the issue.

The present two appeals, otherwise, do not warrant our indulgence on facts, which aspect has been duly taken care of by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal.