Chandra Poojari, Accountant Member. - The first six appeals are cross appeals preferred by the assessee as well as the revenue are directed against the common orders passed by the CIT(A)-II, Hyderabad dated 27-3-2008 and pertains to assessment years 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 dated 13-1-2009 and pertains to assessment year 2005-06. Since common issues are involved in all these appeals, they are clubbed together, heard together and disposed of 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 insofar as it is prejudicial to the assessee.

2.The Assessing Officer erred in passing orders under sections 201(1) and 201(1A) beyond the period of two years from the end of the assessment year.

3.The CIT(A) erred in holding that the provisions of section 194 is applicable to the amounts advanced to Marc Manufacturers (P.) Ltd.

4.The CIT(A) erred in holding that advances made to MMPL comes within the purview of provisions of section 2(22)(e).

5.The CIT(A) erred in holding that the repayments by MMPL cannot be considered while computing deemed dividend under the provisions of section 2(22)(e).

6.The CIT(A) erred in holding that deferred tax also should be considered while considering the reserves and surpluses for the purposes of working out deemed dividend without appreciating the fact that deferred tax is a provision against future liability and cannot be considered as accumulated profit.

7.The CIT(A) erred in holding that amounts paid against supplies also has to be considered for dividend without appreciating the fact that such amounts are considered by MMPL as trading receipts 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 in ITA Nos. 1002, 1003 and 1004/Hyd./2008 which are common in nature as follows :

"1.The CIT(A) erred in holding that the difference between the amount of depreciation admissible under the Income-tax Act and the actual amount of depreciation debited in the books of account has to be deducted for the purpose of computing ‘accumulated profits’ under section 2(22)(e).

2.The CIT(A) has failed to appreciate the fact that making adjustment to ‘book profits’ by allowing depreciation, which is not debited in the books of account, is not intended by the Legislature and such adjustment is also not feasible considering provisions of Explanation 2, section 2(22). Which the expression ‘accumulated profits’ 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 those sub-clauses’.... Allowing of depreciation as provided under the Income-tax Act, up to the date of distribution or payment’ is not feasible. Thus ‘accumulated profits’ referred to in section 2(22)(e) is only commercial book profits determined as per the books of account 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 shareholder and hence, there cannot be any dividend from the other company much less deemed dividend and, therefore, erred in confirming the addition of deemed dividend in the assessee’s case.

2.The CIT(A) erred in holding that there is sufficient reserves and surplus to hold Rs. 3,75,00,000 advanced between 1-4-2004 to 7-4-2004 as deemed dividend under section 2(22) without appreciating the fact that if differed tax and depreciation also is considered for deduction there will not be that much reserves and surpluses on that 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 cannot be calculated in the middle of the year while computing the available reserves and surplus and thereby erred in holding that during the period 3-1-2005 to 12-2-2005, Rs. 80 lakhs is available as reserves to hold the amount advanced as deemed dividend under section 2(22).

5.The CIT(A) failed to appreciate the fact that dividend can be taxed only in the hands of a shareholder and thereby erred in confirming the action of the Assessing Officer assessing deemed dividend in the hands of the assessee though it is not a shareholder of the company which advanced the amounts."

5. Brief facts of the case in assessee’s appeals in ITA Nos. 1162, 1163 and 1166/Hyd./2008 and in Revenue appeals in ITA Nos. 1002 to 1004/Hyd./2008 are that a survey under section 133A was conducted in the case of the assessee during the survey it was noticed that the assessee is a closely held company reporting substantial profits. It was also noticed that the company had transferred huge amounts as loans to a sister concern, named Marc Manufacturers (P.) Ltd. (MMPL) year after years. It was also found that majority of the shareholders in both the companies are common. After verifying the books the Assessing Officer found that the following amounts had been transferred by the assessee-company to MMPL in the financial years 2002-03 to 2004-05 relevant 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 shareholders of the assessee-company viz., P. Jayaprakash Reddy and Smt. P. Leelavati holding more than 10 per cent and 20 per cent of the voting rights respectively were also shareholders of MMPL having more than 20 per cent of the voting rights in that company, the Assessing Officer was of the view that the amount of loan advanced by the assessee-company to MMPL would attract the provisions of section 2(22)(e) of the Income-tax Act meaning thereby that the amount received by MMPL would be deemed dividend in its hand as the provisions of section 2(22)(e) to the extent of accumulated profit possessed 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 following accumulated profits :

Financial year ending on	Amount (Rs.)
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 section 2(22)(e) of the Income-tax Act, the Assessing Officer held that the amount of loan extended 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 held so, the Assessing Officer invoked the provision of section 194 of the Income-tax 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 dividend’ paid to MMPL. Since, the assessee-company had not deducted the tax at source as required under section 194 of the Income-tax Act, the Assessing Officer issued show-cause notice to the assessee-company as to why it should not be treated as an ‘assessee in default’ in terms of section 201(1), read with section 194 of the Income-tax Act.

5.3 In response to the show-cause notice, the assessee-company through its Authorized Representative filed detail reply requesting the Assessing Officer not to treat it as an assessee in default. Following are the contentions raised by the assessee before the Assessing Officer :

(a)M/s. Marc Manufacturers (P.) Ltd. is not a shareholder of the assessee-company and as such the provisions of section 2(22)(e) would not apply.

(b)They were under bona fide impression that the amount given to MMPL is not income in the hands of MMPL and hence there was no obligation on its part to deduct tax at source from such payments.

(c)Provision of section 194 will not attract since the payee i.e., MMPL is not a shareholder in the assessee-company.

(d)On the date of advance the loan, there are no accumulated profits.

(e)The amounts in question are deposits and not loans and hence, the provisions of section 2(22)(e) will not be applicable.

5.4 However, the explanation submitted by the assessee was not accepted by the Assessing Officer. As regards the first contention, the Assessing Officer held that after amendment to section 2(22)(e) with effect from 1-4-1988, the scope of shareholder has been enlarged and the argument of the assessee is no more valid. The Assessing Officer referred to the decision of ITAT, Hyderabad in the case of Hyderabad Chemical Products v. ITO [2000] 72 ITD 323 , wherein it was held that even though the payee company was not a direct shareholder in the payer company, but in view of the amended provisions of section 2(22)(e), the loan given by the payer company would be deemed dividend. The Assessing Officer also referred to the decision of ITAT, Delhi Bench in the case of Bharti Overseas Trading Co. v. Dy. CIT [1999] 106 Taxman 172 (Mag.) decided in favour of the revenue.

5.5 As regards the second contention of the assessee that if the amount received by the payee is not income, there was no need to deduct tax at source, the Assessing Officer observed that in view of the fiction created in section 2(22)(e) of the Act, in treating certain amounts as deemed dividend, the said amounts are liable to TDS in accordance with the provisions of section 194 of the Act. As regards the contention that section 194 applies only if the payee is the shareholder and since the recipient is not a shareholder and that there was no mandate to deduct tax on the deemed dividend, the Assessing Officer observed that section 194 clearly mandates to deduct tax at source on dividend including deemed dividend. There is clear reference to deemed dividend under section 2(22)(e) in section 194 of the Act. Since the deemed dividend did not attract dividend distribution tax under section 115 of the Act the provision of TDS under section 194 would automatically come into operation.

5.6 As regards the contention of non-availability of accumulated profit as on the date of advance, the assessee had emphasized that it would have possessed the profit derived by it. Since, the profit had been spent on installation of plant, machinery, investments and other current assets etc., there was no profit available for the purpose of attracting the provisions of deemed dividend. To this, the Assessing Officer observed that the accumulated profits contemplated under section 2(22)(e) of the Act represents commercial profit arrived at as per the Companies Act. By no stretch of imagination, the case laws submitted by the assessee can be considered as the basis for determination of accumulated profit.

5.7 Rebutting the stand taken by the assessee that the amount in question are deposits and not loans, the Assessing Officer observed that the assessee has taken this plea to avoid the provision of section 2(22)(e). The Assessing Officer further observed that it is a self serving statement not supporting by the facts on record since the books of account as also the narration in the ledger account clearly indicate the amount as loan. Further, the Balance Sheet, the outstanding amount has been shown under the head ‘loans and advances’. Similarly, in the Balance Sheet of MMPL (the payee), the amount was shown under the head ‘unsecured loans’. The Assessing Officer referred to the note to the Auditor’s Report in the case of the payee company, wherein, it was stated that the company did not accept any deposits. On the other hand there was clear reference in the Audit Report for financial years 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 Auditor’s Note to the audited accounts of the payee company (MMPL). The Assessing Officer also observed that section 2(22)(e) refers not only to loan and advance but also to any payment and hence, the assessee’s case clearly fits into the provision of section 2(22)(e) of the Act.

5.8 Thus, after considering all the objections raised by the assessee the Assessing Officer came to the conclusion that the amounts given by the assessee-company to MMPL in the financial years 2002-03, 20003-04 and 2004-05 are Deemed Dividend on which the assessee should have deducted tax at source under section 194 of the Act. Having failed to do so the assessee was required to be treated as an ‘assessee in default’ under section 201(1) of the Act. Further the Assessing Officer observed that the assessee is liable to interest under section 201(1A) of the Act. The Deemed Dividend was worked out by the Assessing Officer on the basis of available accumulated profit. The deemed dividend worked out and the demand raised for the three years are as follows :

Demand u/s 201(1A)	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 made by assessee to M/s Marc Manufacturers (P.) Ltd., (MMPL) would fall within the purview of section 2(22)(e) of the Income-tax Act. Further observed that section 194 of the Income-tax Act nowhere states categorically the paying has to be a registered shareholder of the payer company. Otherwise also the payment made by the assessee to MMPL has already been faxed substantively as ‘deemed dividend’ in the hands of the MMPL (i.e., payee). According to CIT(A) M/s MMPL falls within the meaning of ‘shareholder’ in section 2(22)(e) of the Act which is substantive for bringing the payment to tax net, that interpretation of shareholder would also hold good for the corresponding TDS provision of section 194. Accordingly, he held that the payment made by the assessee-company falls within the purview of section 2(22)(e) as such provisions of section 194 is applicable. Since the assessee not deducted the tax at source for such deemed dividend the assessee is in default for which provisions of sections 201(1) and 201(1A) are applicable. Regarding the computation of ‘accumulated profit’, for deciding the quantum of dividend, there is also dispute. The Assessing Officer while considering the amount received from the assessee by MMPL did not consider repayment made by MMPL and took into consideration the gross amount received by MMPL from the assessee. The assessee contended before the CIT(A) that repayment amount should be reduced while calculating the deemed dividend under section 2(22)(e). The assessee also contended before CIT(A) that the Assessing Officer wrongly arrived accumulated profit by considering depreciation as provided in the books of account without considering depreciation as per Income-tax Act. There is also dispute regarding the inclusion of deferred tax reserve within the reserve 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-section (22) of section 2, the day-to-day accumulated profit to be considered. The CIT(A) rejected this ground placing reliance on various orders of Tribunals as well as Bombay High Court by holding that even on the date of credit entries for the ‘off loading amount’, the balance in the account of MMPL (the payee) were showing debit balance thus the payments made by the assessee to MMPL are still to be treated as advance within the ambit of section 2(22)(e) of the Income-tax Act. The assessee is in appeal before us on the issue relating to invoking the provisions of sections 201 and 201(1A) on the reason that the provisions of section 194 is applicable on advance made to MMPL comes within the purview of provisions of section 2(22)(e). The assessee is also disputed before us the issue relating to computation of accumulated profit by including deferred tax in the Reserves and Surplus. Further the assessee taken a plea before the CIT(A) that payment is made to MMPL is deposits and not loans. Further taken a plea that some amounts were paid to MMPL against certain supplies made by them and pleaded payment against supplies should be reduced for the purpose of calculation of deemed dividend. This plea of the assessee is rejected by the CIT(A). Against all these findings the assessee is also in appeal before us.

7. The revenue is having grievance on direction given by CIT(A) relating to consideration of depreciation as per Income-tax Act while computing the accumulated profits under section 2(22)(e).

8. We have heard both the parties and perused the material on record. The main contention of the assessee is that there is no deemed dividend in the hands of recipients company i.e., M/s MMPL as this issue relating to the treatment of this impugned 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 the assessee by holding as follows :

"6. We have heard the rival submissions and perused the record. During the year under consideration, the assessee had received a sum of Rs. 1,98,00,000 from M/s MTAR Technologies (P.) Ltd. Has accumulated profits to the tune of Rs. 6,13,58,367 as on 31-3-2004. Taking 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 MTAR Technologies out of the accumulated profits. He further came to the conclusion that the amount aggregating to Rs. l,98,00,000 which has been accepted by the assessee-company during the accounting year relevant 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 section 2(22)(e) of the Act in the assessee’s case. He further brought the amount to tax as deemed dividend income in the assessee’s case under the head ‘income from other sources’ for the year under consideration. The assessee’s explanation was not accepted by the Assessing Officer. From the assessment records, it is seen that the assessee has 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 is 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 in which public are substantially interested, of any sum whether as representing a part of the assets of the company or otherwise made after the 31st of May, 1987 by way of advance or loan to a shareholder, being a person who is the beneficial owner whether with or without a right to participate in profits, holding not less than 10 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 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 parties. The learned counsel for the assessee submitted that though Shri Vali M. Kasim who is Director of the assessee-company and also Director and shareholder 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 none of the companies is the shareholder of the assessee-company. It is argued that the dividend income can be received only by the shareholder and as the assessee-company is not the shareholder of the other group companies, 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 v. Bhaumik Colours (P.) Ltd. in 27 SOT (Mum.) (SB) and also CIT v. Hotel Hill Top 217 ITR 527 (Raj.). We have heard the learned Departmental Representative on this issue.

7. As per the facts on record the assessee-company is having no shareholding in the other group companies. It is well-settled principle that dividend income is only received by the shareholder. Identical issue has come for consideration before the Hon’ble Special Bench, ITAT Mumbai in the case of Bhaumik Colours (P.) Ltd. (supra) and it is held as under :

‘35. The basis of bringing in the amendment to section 2(22)(e ) of the Act by the Finance Act, 1987 with effect from 1-4-1998 is to ensure that persons who control the affairs of a company as well as that 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 same from the concern instead of the company directly making payment to the shareholder as dividend. The sources of power to control the affairs of the company and the concern is the basis on which these provisions have been provisions 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 under section 5(1)(b) in the hands of the shareholder only and not in the hands of the payee, viz., non-shareholder (concern). Section 5(1)(a) contemplates that the receipt 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 not the non-shareholder viz., the concern.

36. The definition of ‘Dividend’ under section 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 meaning to include even a loan or advance. Any loan or advance cannot be dividend according to its ordinary and natural meaning. The ordinary and natural 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 to a concern in which a shareholder is substantially interested deeming them as dividend in the hands of a shareholder the ordinary and natural meaning of 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 natural meaning of the word ‘dividend’ is taken away. In the light of the intention 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 Hon’ble Special Bench has also referred to and relied on the principles laid down by the Hon’ble High Court of Rajasthan in the case of Hotel Hill Top (supra), in which it is held as under :

‘7. The more important aspect, being the requirement section 2(22)(e) is, that the payment may be made to any concern, in which such shareholder is a member, or the payment by any such company, on behalf or for the individual benefit of any such shareholder. Thus, the substance of the requirement is, that the payment should 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 benefit of any such shareholder, obviously, the provision is intended to attract the liability of tax on the person on whose behalf company whether to the shareholder, or to the concerned ‘deemed dividend’. Obviously, income from dividend, is taxable as income from other sources, u/s 56 of the Act and in the very nature of things, the income has to be of the person earning the income. The assessee in the present case is not shown to be one of the persons, being shareholder. Of course 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 the deemed dividend would not be deemed dividend in the hands of the firm, rather it would obviously be deemed dividend in the hands of the individuals, on whose behalf or on whose individual benefit, being such shareholder, the amount is paid by the company to the concern.’

The above facts are akin to the facts of the instant case. The Mumbai Bench of the Tribunal taking the note of the Special Bench decision in the case of ACIT v. Bhaumik Color (P.) Ltd. [2009] 27 SOT 270 allowed the claim of the assessee.

7. In this case also, the assessee has given the following information :

Insofar as the question as to whether payment made by MTAR Technologies (P.) Ltd. to MTAR Technologies (P.) Ltd. unless the assessee is a shareholder in the company making the payment, the amount received shall not be treated as income within the meaning of section 2(22)(e) of the Income-tax Act. The assessee submits that the amended provisions of section 2(22)(e) are explained in detail by the Circular No. 495 dated 22-9-1987 issued by the CBDT reported in 168 ITR (Statutes) 87. In the said circular the intention of introducing clause (e) of sub-section (22) of section 2 is mentioned. An extract of the said circular is given below :

‘With the deletion of sections 104 to 109 there was a likelihood of closely held companies not distributing their profits to shareholders by way of dividends but by way of loans or advances so that these are not taxed in the hands of the shareholders. To forestall this manipulation, sub-clause (e), clause (22) of section 2 has been suitably amended.’

5. It can be seen from the circular that the provisions of amended section 2(22)(e) are to be applied only to the payments made to the shareholders and not to any other person or concern other than shareholders. The Allahabad High Court in the case of Commissioner Of Income-Tax v. H.K Mittal 219 ITR 420 held that the chief ingredient of dividend as defined in sub-clause (e) of clause (22) of section 2 of the Act is that the recipient should be a shareholder on the day the loan was advanced. If that fact is not established, there cannot be a deemed dividend. Therefore, the provisions of section 2(22)(e) cannot be applied to MARC as it is not a shareholder in MTAR Technologies (P.) Ltd. In this regard, the assessee relies on the decision of the ITAT Mumbai Bench ‘G’ in the case of Seamist Properties (P.) Ltd. v. ITO [2005] 1 SOT 142. The assessee further submits that the provisions of section 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 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 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.’

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 section 2 is further fortified by the fact that for deduction of tax at source. Section 194 provide that such deduction of tax has to be made in the case of the payments of the nature mentioned in clauses (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. Section 199, also indicates that adjustment of TDS would be provided in the assessment of shareholder only. The very fact that the provision for deduction of tax at source and adjustment of tax is only in respect of the payments to the shareholder would clearly indicate that even after the amendment, the effect of clause (e) of sub-section (22) of section 2 would apply only when the payment is made to a shareholder. Wherever, the tax is to be deducted at source from a dividend or deemed dividend and the consequential effect of giving effect to such deduction of tax at source, etc., reference was made only to the payments to the shareholder. 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 also submits that the provisions of Income-tax Act for deduction of tax at source in respect of the dividend are contained in section 194 which reads as under :

‘Dividends : The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration 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 distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause ( c) or sub-clause (d) 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 situations namely :—( a) before making any payment in cash or before issuing any cheque or warrant in respect of dividend or (b) before making any distribution or payment to a shareholder, who is a resident of India, of any dividend within the meaning of clause (a) or sub-clause (b) or sub-clause ( c) or sub-clause (d) or sub- clause (e) of clause (22) of section 2 of the Income-tax Act (The word ‘shareholder’ are relevant for the purpose of determining the issue under consideration).

On going through the explanation offered by the assessee before the authorities below and also considering the decisions rendered by the Bombay Benches of the Tribunal in the aforesaid case, we find much force in the stand taken by the assessee. The issue under consideration is squarely covered by the decisions cited above. Considering the same, we direct the Assessing Officer to allow the claim of the assessee 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 assessee is allowed." (Emphasis supplied)

9. He also relied on the order of Special Bench, Mumbai in the case of Asstt. CIT v. Bhaumik Colour (P.) Ltd. [2009] 118 ITD 1. Further contention of the assessee counsel is that no fund has been transferred to the benefit of individual shareholders as such there is no deemed dividend. He relied on the judgment in the case of Commissioner Of Income Tax, Kolkata v. Mukundray K. Shah [2007] 290 ITR 433 (SC). He also submitted that this is only a trading receipt. In our opinion, deemed dividend could be assessed only in the hands of person who is shareholder of the lender company and not in the hands of a person other than the shareholder. The provisions of section 2(22)(e) do not spell out as to whether the income has to be taxed in the hands of shareholder or concern (non-shareholder). The provisions are ambiguous. It is, therefore, necessary to examine the intention behind enacting the provisions of section 2(22)(e). The intention behind enacting provisions of section 2(22)(e) is that closely held companies (i.e., companies in which publics are not substantially interested) which are controlled by a group of share-holders, even though company has accumulated profits would not distri-bute such profit as dividend because if so distributed the dividend income would become taxable income in the hands of the shareholders. Instead of distributing accumulated profit as dividend, company distribute them as loans or advances to shareholders or to concern in which such share-holders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholders. 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) is to tax dividend in the hands of shareholders. The deeming provision as it applies in the case of loans or advances by a company to a concern in which its shareholders has substantial interest is based on the presumptions that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advances. The intention of the Legislature is therefore, 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 section 2(22)(e) by the Finance Act, 1987, with effect from 1-4-1988 is to ensure that persons who control the affairs of a company as well as that of a firm can have the payment made to a concern from the company and the person 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 dividend. The source of power to control the affairs of the concern can draw the same from the concern instead of the company directly. It is, therefore, proper to construe those provisions as contemplating a charge to tax in the hands of the shareholder and not in the hands non-shareholder i.e., MMPL. A loan or advance received by MMPL is not in the nature of income. In other words, there is a deemed accrual of income only in the hands of shareholders not in the hands of non-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 shareholders and not in the hands of non-shareholders. Further, the CBDT Circular No. 495, dated 22-9-1987, to the extent not benevolent is not binding. In the event of the payment of loan or advance by a company to a concern being treated as dividend and taxed in the hands of the concern, then the benefit of set off under section 2(22)(e)( iii) cannot be allowed to that concern, because the concern can never receive any dividend from the company which is only paying to the shareholder who has substantial interest in the company. The provisions of sub-clause (iii) of section 2(22)( e) also, therefore, contemplate deemed dividend being taxed in the hands of shareholder only. The view has been taken by Coordinate Bench in the case cited supra.

10. We are of the opinion that payment or advances to non-shareholders does not require TDS under section 194 and assessee cannot be held to be default under section 201 so as to attract interest under section 201(1A) of the Income-tax Act. It is to be noted that under section, provisions of Companies Act, every company is expected to maintain a register of share- holder under section 150 of the Companies Act. Company is not obliged to maintain any register wherein details of such concerns may be maintained to which provisions of section 2(22)(e) of the Income-tax Act apply. Under these circumstances, when payment is made to a non-shareholder, it is impossible for the payer company to ascertain whether it will attract the provisions of section 2(22)(e) of the Income-tax Act or not. Therefore, in this view of the matter, law does not expect the payer company to deduct TDS when payment is made to a non-shareholder. This is the reason, the law expressly provides for TDS requirements only when payment is made to shareholder. Thus, section 194 requires TDS only when payment is made to the shareholder. Payments to a shareholder will cover both as dividends normal divided as well as deemed dividend. Otherwise also, deemed dividend will be taxed in the hands of the shareholders and not in the hands of non-shareholders payee. Therefore, section 194 does not require TDS when payment is made to non-shareholders. Also, under section 206 of the Companies Act, 1956 the dividend can be paid a registered shareholder only. Therefore, section 194 of the Act is synchronized with the requirements of Companies Act, 1956 containing sections 150 and 206 of the Companies Act. Accordingly, in our opinion, the impugned amount cannot be as deemed income in the hands of recipient being so the provisions of section 194 is not applicable. Consequently, the provisions of sections 201 and 201(1A) cannot be applied.

11. The assessee also raised a note that the payments are made towards supplies in ordinary course of business. Under section 2(22)(e), only the payments made by a company by way of advance or loan to a shareholder alone is to be considered for the purpose of deemed 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 on by both the parties could not be treated as deemed dividend for the purpose of section 2(22)(e). The law does not prohibit business transaction between related parties and, therefore, payment made in ordinary course of business cannot be treated as loans and advances. Therefore, payment made by a company in the course of carrying of his regular business through a mutual, open to a related party do not come under the purview of section 2(22)(e).

11.1 The Departmental Representative strongly relied on the order of Tribunal, Hyderabad in the case of Hyderabad Chemical Products (supra). Since, we have followed the order of the Special Bench, Mumbai, we are declined to agree with arguments with the Departmental Representative with regard to order of Hyderabad Bench.

11.2 The Departmental Representative also relied on judgment of Supreme Court in the case of Mukundray K. Shah (supra). In the case before the Supreme Court, company 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 were withdrawn by assessee and utilized for purchase of RBI Bonds, the amounts were advanced by MKSEPL for the benefit of the assessee by using the two firms as conduce and the said amount was rightly assessed as deemed dividend. However, in the case before us there is no findings by the lower authorities that the common directors withdrawn any amount from the receipts companies for their personal benefit. As such, the ratio laid down by the Hon’ble Supreme Court cannot be applied to the facts of present case.

12. Now coming to the fact of computation of accumulated profit, since we have held that in the present case there is no question of application of provisions of section 2(22)(e), consequently, there is no question of computation of accumulated profit. In view of this, all the three Revenue appeals become infructuous.

13. Now there is one more appeal of the assessee in ITA No. 787/Hyd./2009. This issue already covered in favour of the assessee by the Order of the Tribunal dated 31-8-2009 for the assessment year 2004-05 cited in Para. Respectfully, following the ratio 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 allowed.

14. In the result, all the assessee appeals are allowed and revenue appeals are dismissed as infructuous.