Application of the Act-After extension of Income-tax Act, 1961 to State of Sikkim with effect from 1-4

830 Pages·2016·6.22 MB·English

CONSOLIDATED DIGEST OF CASE LAWS (JANUARY 2015 TO DECEMBER 2015)

(Journals Referred: ACAJ /AIR/AIFTPJ/ BCAJ / BLR / IT Review//Comp Cas/CTR / CCH/DTR
/E.L.T./GSTR/ ITD / ITR / ITR (Trib) /JT/ SOT /SCC / TTJ /Tax LR /Taxman / Tax World/ VST/
www.itatonline.org)

Compiled by Research team of KSA Legal Chambers and AIFTP Journal Committee

S. 1 : Application of the Act-After extension of Income-tax Act, 1961 to State of Sikkim with
effect from 1-4-1990, Sikkim State Income-tax Manual, 1948, stands repealed and assessments
made there under for assessment years 1997-98 to 2005-06 were without authority of law, nonest
and nullity.[Sikkim State Income-tax Manual, 1948, S.17]
The assessee university was established in the year 1995 by an enactment of the Sikkim State
Government. On 7-7-2006, the AO passed an assessment order under the Sikkim State Income-tax
Manual, 1948,for the assessment years 1997-98 to 2005-06. The assessee filed an appeal before the
Special Commissioner for cancellation of the assessment order, claimed refuna.p.d of the ad hoc
payment with interest and also claimed exemption u/s.17 of the Sikkim State Income-tax Manual,
1948. The Special Commissioner upheld the order of AO.
On a Writ Petition by the assessee, the High Court observed that the Sikkim State Income-tax Manual,
1948, stood repealed after extension of the Income-tax Act, 1961, in the State of Sikkim with effect
from 1-4-1990. It further observed that the assessee was claiming its rights as an assessee under the
Income-tax Act, 1961. The High Court held that after extension of the Income-tax Act, 1961 to the
State of Sikkim, the Sikkim State Income-tax Manual, 1948, stands repealed and the assessments
made thereunder are without authority of law, non est and nullity.(AY. 1997-1998 to 2005-2006).
Sikkim Manipal University v. State of Sikkim (2014) 369 ITR 567 / (2015) 113 DTR 23 /232
Taxman 360 /273 CTR 25 (Sikkim) (HC)

S. 2(1A) : Agricultural income–Tilling of land, weeding, watering etc.-Sale proceeds from said
business of nursery carried on by assessee constitute income from agriculture. [S. 10(1)]
Assessee HUF had carried out operations such as tilling of land, weeding, watering, etc. upon land
owned by it and when plants were established in soil they were shifted in suitable containers for sale .
Sale proceeds from said business of nursery carried on by assessee constitute income from
agriculture.(AY. 1986-87, 1991-92)
Puransingh M. Verma v. CIT (2015) 230 Taxman 470 (Guj.)(HC)

S. 2(1A) : Agricultural income-Selling only sun dried coffee seeds and was not engaged in other
processing activities, its income from coffee estate had to be computed by applying, Rule 7B.
[R.7B]
The assessee filed his return declaring agricultural income from coffee estate. The Assessing Officer
by applying rule 7B took income from agriculture and income from business in the ratio of 75 per
cent and 25 per cent respectively. The CIT(A) found that the assessee was not marketing any coffee
product and he was only an agriculturist, he allowed assessee's claim of agricultural income exempt
from tax. The ITAT held Rule 7B(1) says that when the assessee derived income from sale of coffee
grown and cured by seller in India, 25 per cent of income shall be treated as from business and 75 per
cent shall be treated as income from agriculture. However, if the assessee derives income from sale of
coffee grown, cured, roasted and grinded with or without mixing chicory or other flavouring
ingredients, then 40 per cent of income shall be treated as from business for the purpose of taxation
under the Act. The balance 60 per cent has to be treated as income from agriculture. If the assessee
was selling only cured coffee seeds, the provisions of rule 7B(1) would come into operation.
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Consequently, income from coffee estate has to be computed by applying rule 7B of Income-tax
Rules, 1962.Appeal of revenue was allowed. (AY. 2006-2007)
ITO v. T.C. Abraham (2015) 155 ITD 861 (Chennai)(Trib.)

S. 2(1A) : Agricultural income –Growing of mushroom-Within municipal limits- Income from
growing ofsaid mushroom to be treated as non-agricultural income.[S.10(1)]
Assessee claimed growing of mushroom as agricultural income . AO denied the exemption. On appeal
the Tribunal held that there was no land on which tilling operations etc., was carried out, and same
was basic operation for carrying out agricultural activities, further, entire activity was carried on in
residential area within municipal limits and mushrooms were grown under controlled conditions,
since assessee had failed to explain basic agricultural operations carried out in mushroom production,
income from growing of said mushroom to be treated as non-agricultural income.(AY. 2003 -04 , 200
4-05)
Chander Mohan .v. ITO (2014) 52 taxmann.com 203 / (2015) 67 SOT 28 (Chd.)(Trib.)

S.2(14)(iii):Capital asset-Agricultural land—Measurement-Distance to be measured from
agricultural land to outer limit of municipality by road--Not by straight line or aerial route. [
S.45 ]
Dismissing the appeal of revenue the Court held that for the purposes of section 2(14)(iii)(b), the
distance had to be measured from the agricultural land in question to the outer limit of the
municipality by road and not by the straight line or the aerial route. The distance had to be measured
from the land in question itself and not from the village in which the land is situated. (AY. 2006-
2007)
CIT v. Vijay Singh Kadan (2015) 378 ITR 71/ 63 taxmann.com 22/128 DTR 292 (Delhi)(HC)

S.2(14)(iii):Capital asset-Agricultural land-Land situated within prescribed distance from
municipal limit-Measurement of distance for purpose of agricultural land-Amendment in 2014
providing that distance should be measured aerially-Prospective and not to apply to earlier
years.[S. 28(1), 45]
Held, dismissing the appeals, (1) that the amendments in the taxing statute, unless a different
legislative intention is clearly expressed, shall operate prospectively. If the assessee has earned
business income and not the agricultural income, section 11 of the General Clauses Act, 1897, will
prevail unless a different intention appears to the contrary. The relevant amendment prescribing that
the distance to be counted must be aerial came into force with effect from April 1, 2014. The need for
the amendment itself showed that in order to avoid any confusion, the exercise became necessary.
This exercise to clear the confusion, therefore, showed that the benefit thereof must be given to the
assessee. In such matters, when there is any doubt or confusion, the view in favour of the assessee
needs to be adopted. Circular No. 3 of 2014, dated January 24, 2014,( 2014) 361 ITR 1 (St.) dealing
with applicability expressly stipulates that it takes effect from April 1, 2014, and, therefore,
prospectively applies in relation to the assessment year 2014-15 and subsequent assessment years.
Hence, the question whether prior to the assessment year 2014-15 the authorities erred in computing
the distance by road did not arise at all.
(ii) That the capital gains arising from the transaction in respect of agricultural land could not be
considered as business income. (AY. 2009-2010)
CIT .v.Nitish Rameshchandra Chordia (2015) 374 ITR 531/ 126 DTR 116 / 231 Taxman 724
(Bom.) (HC)

S. 2(15): Charitable purpose-If the definition of "charitable purpose" is construed literally, it is
violative of the principles of equality & unconstitutional. Merely charging of fee does not
destroy the character of a charitable institution.[S.10(23C)(iv), Constitution of India, Art 14]]
The DGIT (E) passed an order stating that though the assessee is engaged in “the advancement of any
other object of general public utility” as per s. 2(15) of the Act, its object could not be regarded as
“charitable purposes” due to the new proviso to s. 2(15) and that it was not eligible for exemption u/s
10(23C)(iv). It was held that as the assessee had huge surpluses in banks, it had given its space for
rent during Trade Fairs and Exhibitions, it had received income by way of sale of tickets and income
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from food and beverage outlets in PragatiMaidan, etc, the assessee was rendering service to a large
number of traders and industrialists in relation to trade, commerce and business and was, therefore, hit
by the expanded list of activities contained in the proviso to Section 2(15). It was further observed
that the service of allotting space and other amenities like water, electricity and security, etc. to the
traders to conduct their exhibitions fell within the ambit of any activity of rendering any service in
relation to trade, commerce or business. The assessee filed a writ petition claiming that the First
Proviso to s. 2(15), as amended by the Finance Act, 2008, is arbitrary and unreasonable and violative
of Article 14 of the Constitution of India. HELD by the High Court:
(i) It is apparent that merely because a fee or some other consideration is collected or received by an
institution, it would not lose its character of having been established for a charitable purpose. It is also
important to note as to what is the dominant activity of the institution in question. If the dominant
activity of the institution was not business, trade or commerce, then any such incidental or ancillary
activity would also not fall within the categories of trade, commerce or business. It is clear from the
facts of the present case that the driving force is not the desire to earn profits but, the object of
promoting trade and commerce not for itself, but for the nation – both within India and outside India.
Clearly, this is a charitable purpose, which has as its motive the advancement of an object of general
public utility to which the exception carved out in the first proviso to Section 2(15) of the said Act
would not apply;
(ii) If a literal interpretation were to be given to the said proviso, then it would risk being hit by
Article 14 (the equality clause enshrined in Article 14 of the Constitution). It is well-settled that the
courts should always endeavour to uphold the Constitutional validity of a provision and, in doing so,
the provision in question may have to be read down;
(iii) Section 2(15) is only a definition clause. The expression “charitable purpose” appearing in
Section 2(15) of the said Act has to be seen in the context of Section 10(23C)(iv). When the
expression “charitable purpose”, as defined in Section 2(15) of the said Act, is read in the context of
Section 10(23C)(iv) of the said Act, we would have to give up the strict and literal interpretation
sought to be given to the expression “charitable purpose” by the revenue;
(iv) The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves
out an exception from the charitable purpose of advancement of any other object of general public
utility and that exception is limited to activities in the nature of trade, commerce or business or any
activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any
other consideration. In both the activities, in the nature of trade, commerce or business or the activity
of rendering any service in relation to any trade, commerce or business, the dominant and the prime
objective has to be seen. If the dominant and prime objective of the institution, which claims to have
been established for charitable purposes, is profit making, whether its activities are directly in the
nature of trade, commerce or business or indirectly in the rendering of any service in relation to any
trade, commerce or business, then it would not be entitled to claim its object to be a ‘charitable
purpose’. On the flip side, where an institution is not driven primarily by a desire or motive to earn
profits, but to do charity through the advancement of an object of general public utility, it cannot but
be regarded as an institution established for charitable purposes.
India Trade Promotion Organization .v. DGIT(E)(2015) 371 ITR 333/229 Taxman 347/ 274
CTR 305/ 114 DTR 329 (Delhi)(HC)

S. 2(15) : Charitable purpose- Society set up by Government of India and disbursing subsidies-
Society charging fees for processing subsidy applications-Not business activity-Society's
activities do not cease to be charitable-Entitled to exemption.[S.10(23C)(iv)]
Allowing the appeal the Tribunal held that ;the authorities were in error in invoking the first proviso
to section 2(15), particularly as it was not their case that the assessee was carrying out any business
activity in charging the processing fees or service fees, even if the receipts on account of application
forms could be construed as such, from the applicants for subsidy. The assessee had charged fees for
processing subsidy applications and charging processing fees or service charges which was not a
business activity of the assessee and the activities did not cease to be charitable activities under
section 2(15) and the assessee was entitled to exemption under section 10(23C)(iv).(AY. 2009-2010 )
National Horticulture Board v. ACIT (2015) 40 ITR 710 (Delhi)(Trib.)

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S. 2(15) : Charitable purpose -when business activities are carried by assessee trust 'in course of
actual carrying out of such advancement of any other object of general public utility, benefit of
S. 11 cannot be declined. [S. 11]
Allowing the appeal of assesse the Tribunal held that; Proviso to S.2(15) as substituted by finance act,
2015 is applicable with prospective effect; even post insertion of proviso to S. 2(15) but before 1-4-
2016, when business activities are carried by assessee trust 'in course of actual carrying out of such
advancement of any other object of general public utility, benefit of S. 11 cannot be declined.( AY.
2004-05 to 2007-08, 2009-10 to 2011-12)
Hoshiarpur Improvement Trust v. ITO (2015) 155 ITD 570(Asr.)(Trib.)

S. 2(15) : Charitable purpose - Activities carried out by a Trust for providing employment to
rural poor cannot be held as commercial activities.-Activities of Trust is eligible for
exemption.[S.11]
The assessee-trust contemplates to organize milk societies for facilitating sale of milk; the underlying
intention is to get good price for the milk sold by the villagers and also to encourage them to rear their
own milch animals. The villagers can earn a decent livelihood by engaging themselves in rearing of
milch animals and selling of milk without middlemen and exploitation, through the societies formed
under the guidance of the assessee trust. This is the same case with other proposed activities like
ginning, spinning, fruit processing etc., where labour of the village women-folk can be fruitfully
deployed, to keep away exploitation. The Hon’ble Appellate Tribunal held that the economic
activities in the above nature cannot be treated as activities in the nature of trade, commerce or
business as contemplated in proviso to section 2(15). Therefore, we find that the Director of Income-
tax (Exemptions) has characterized the activities of the assessee trust as commercial in nature without
going into the circumstances in which the activities are contemplated to be carried on by the assessee
trust.
Thamizh Thai Seva Trust v. DIT (2015) 67 SOT 166 (URO)/53 taxmmann.com 215
(Chennai)(Trib.)

S. 2(15) : Charitable purpose -Advancement and development of trade, commerce and industry
in India, income earned from incidental activities is eligible for exemption under section
11.[S.11, 12A]
Assessee Association was set up for the purpose of promotion and protection of Indian Business &
Industry and was registered u/s 12A. the purpose for which the assessee association was established is
a charitable purpose within the meaning of section 2(15). The assessee is carrying out activities which
are incidental to the main object of the Association and which are conducted only for the purpose of
securing the main object which is the advancement and development of trade and commerce and
industry in India. The activities are not in the nature of business and there is no motive to earn profit.
Thus, the incidental activities were well covered by the section 2(15) and were thus 'charitable' in
nature. In such an eventuality, the application of the section 11(4A) which applies only to business
activities stands absolutely negated. Thus the income of the assessee is exempt from tax under section
11. (AY. 2008-09)
Indian Chamber of Commerce v. ITO(E) (2014) 52 taxmann.com 52 / (2015) 67 SOT 176(URO)
/ 167 TTJ 1 / 37 ITR 688 (Kol.)(Trib.)

S. 2(15) : Charitable purpose-Receiving fees simplicitor is not reason enough to hold that the
activity is not a charitable activity. The fundamental essence of the activity has to be seen.[S.
12A, 12AA]
The assessee institution is set up by the Indian Army and it seeks to promote the well being of their
personnel after their retirement from the service, as also of the widows and dependents of the brave
army men who sacrifice their lives, and help them integrate in the civil society by taking up suitable
employment. This is surely an activity of general public utility, and, therefore, covered by the
definition of ‘charitable purposes’ under section 2(15). The true test for deciding whether an activity
is business activity is (i) whether the said activity undertaken with a profit motive, or (ii) whether the
said activity has continued on sound and recognized business principles, and pursued with reasonable
continuity. Clearly, therefore, in a situation in which an activity is not undertaken with a profit motive
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or on sound and recognized business principles, such an activity cannot be considered to be a business
activity.
Army Welfare Placement Organization .v. DIT(E)(2015)168 TTJ 588 / 53 taxmann.com 442 / 38
ITR 1/ 68 SOT 535 (Delhi)(Trib.)

S. 2(22)(e) : Deemed dividend-Company was substantially carrying on business of lending
money which was its main business –Loan to share holder could not be treated as deemed
dividend.
The assessee took a loan from a company in which he was a shareholder to the extent of 15 per cent.
The Assessing Officer treated the loan as deemed dividend, which was confirmed in appeal by
Commissioner of Income tax (Appeals) and Tribunal. On appeal allowing the appeal the Court held
that;
It is not possible to give a fixed definition of the word 'substantial' in relation to substantial business
of a company. Any business of a company, which is not trivial or inconsequential as compared to the
whole of the business, would be termed as substantial part of the business. In the instant case, the
Assessing Officer has held that the business of giving loans and advances by company constituted less
than 20 per cent of the total investment and, therefore, the same is not a substantial part of the
business of the company. Such reasoning is per semis conceived. The company was admittedly
engaged in the business of loans and advances, as is clear from the memorandum of association. The
Tribunal picks holes from the balance sheet of the company contending that under the heading 'Loans
and Advances' the company had made sub-groups, namely, 'Loans and Advances' and 'stocks on hire
including hire purchase'. The Tribunal, therefore, concluded that a substantial part of the business of
the said company was hire purchase. The Tribunal has side tracked the issue without realising that
'stocks on hire' was also shown under the heading of 'Loans and Advances' in the balance sheet of the
company. The break-up of different kinds of loans and advances indicated by the said company in its
balance sheet was for its convenience. The fact remains that the company was substantially carrying
on the business of lending money which was its main business. In the light of the aforesaid, the
Tribunal and the authorities below committed a manifest error in holding that the loan and advance
given by the company to the assessee was a deemed dividend. In fact, it was covered by the
exclusionary item (ii) of section 2(22)(e). (AY. 2003-04)
Ravi Agarwal v. ACIT (2015) 235 Taxman 560 (All.)(HC)

S. 2(22)(e) : Deemed dividend- No accumulated profits-Addition cannot be made as deemed
dividend. [Companies Act, S.78]
Dismissing the appeal of revenue the Court held that; instant case it was never contention of revenue
that any accumulated profit was lying with company instead company was having a reserve created
from out of share premium. Since assessee-company created a reserve out of share premium,
provisions of section 2(22)(e) would not be applicable as same would be governed by section 78 of
Companies Act, 1956. (AY. 2001-02)
CIT v. Mahesh Chandra Mantri (2015) 234 Taxman 158 (Cal.)(HC)

S. 2(22)(e) :Deemed dividend –Lending money is substantial part of business- Amount could not
be assessed as deemeddividend.
During year under consideration, assessee received certain loans from companyJMC Securities Pvt.
Ltd.wherein he was holding more than 10 per cent shares. It was found that lending of money was
substantial part of business of company hence loan amount could not be taxed in assessee's hands as
deemed dividend.(AY. 2006-07)
CIT v. Jayant H. Modi(2015) 232 Taxman 337 (Bom.)(HC)

S. 2(22)(e):Deemed dividend–Loan or advance-Recipient of loan, was not a shareholder of SIPL,
provisions would not apply.
Assessee had received a sum by way of loan or advance from SIPL. As two shareholders of SIPL had
a beneficial ownership of shares of assessee, Assessing Officer held that payment by way of loan or
advance was a dividend under section 2(22)(e).Tribunaldeleted the addition.On appeal by
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revenue,dismissing the appeal the Court held that, since recipient of loan, namely, assessee was not a
shareholder of SIPL, provisions of section 2(22)(e) would not apply. (AY. 2006-07)
CIT v. N. S. N. Jewellers (P.) Ltd. (2015) 231 Taxman 488 (Bom.)(HC)

S. 2(22)(e):Deemed dividend-Advance in the course of business- Addition cannot be made as
deemed dividend.
BDPL, a closely held company, advanced money to assessee who was holding 99 per cent shares of
BDPL .According to assessee, in Karnataka, companies were not allowed to buy land which was of
agricultural status and, therefore, funds were given by BDPL to procure land in name of directors and
hold same in form of capital asset and then transfer back to company after obtaining conversion order.
Whether since balance sheet and journal entries in books of account amply made it clear that funds
were provided during course of business, advances made by BDPL to assessee would not fall within
the definition of 'dividend' as contained in section 2(22)(e) . (AY. 2002 - 03 to 2007 - 08)
Bagmane Constructions (P.) Ltd. .v. CIT (2015) 277 CTR 338 / 231 Taxman 260 (Karn.)(HC)

S. 2(22)(e):Deemed dividend –Advance in the course of business- Business expediency- Not
assessable as deemed dividend.
Assessee was a substantial shareholder in a company.Company received certain export orders but was
not in a position to execute these orders as its manufacturing facility was situated in a remote area and
was beset with labour problems and erratic supply of electricity. Company, therefore, entered into an
agreement with assessee to install plant and machinery at premises of assessee to enable assessee to
do job work for company. Assessee also received certain sum as advance from said company to do
job work at interest rate below prevailing market rate. Tribunal found that advances were received by
assessee in normal course of business as a matter of business expediency and, hence, said advance
was not covered by section 2(22)(e). On appeal by revenue the Court held that finding of facts
recorded by Tribunal could not be interfered with.
CIT .v. Amrik Singh (2015) 231 Taxman 731 (P&H)(HC)
Editorial: SLP of revenue was dismissed , CIT v . Amrik Singh ( 2015) 234 Taxman 769 (SC)

S. 2(22)(e):Deemed dividend-Mistake in ROC return-Deletion of addition was held to be
justified.
Assessee, a director of Frontier Cycles Pvt. Ltd. whoreceived certain loan from said company. During
relevant year, Assessing Officer downloaded annual return of Frontier Cycles Pvt. Ltd. from website
of ROC and found that assessee was holding 38.8 per cent shares in said company. He thus treated
amount of loan as deemed dividend. It was found from records that assessee had already gifted 30 per
cent of its shareholding in Frontier Cycles Pvt. Ltd. to his wife and son in earlier assessment year and
it was only on account of mistake on part of concerned employee of Frontier Cycles Pvt. Ltd. ROC
could not give effect to share transfer agreement in annual returns. Tribunal held that addition could
not be made as deemed dividend. High Court affirmed the view of Tribunal and held that impugned
addition made by Assessing Officer was to be deleted. (AY. 2008-09)
CIT .v. Paramjit Singh (2015) 231 Taxman 450 (P&H)(HC)

S. 2(22)(e):Deemed dividend-Loan to shareholder by closely held company-Assessee owning
60% shares of company-Company possessing accumulated profits-Amounts taken as loan from
company and payments also made to company - Assessing Officer directed to verify each debit
entry and treat only excess as deemed dividend.
Held, the assessee was admittedly a shareholder and director of KIPL. Therefore, any amount paid to
the assessee by the company during the relevant year, less the amount repaid by the assessee in the
same year, should be deemed to be construed as "dividend" for all purposes. However, the Assessing
Officer had taken the entire amount of Rs.76,86,829 received by the assessee from the company as
dividend, while computing the income but had lost sight of the payments made. In such
circumstances, the Commissioner (Appeals) had rightly come to the conclusion that the position as
regards each debit would have to be individually considered because it may or may not be a loan. The
Assessing Officer, was, therefore, directed to verify each debit entry on the aforesaid line and treat
only the excess amount as deemed dividend under section 2(22)(e) of the Act. Such a direction issued
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by the Commissioner (Appeals), as upheld by the Tribunal, was in consonance with the provisions of
section 2(22)(e) of the Act and only those amounts, which were reflected in the debit side of the books
of account of the company falling under the definition of loans and advances with regard to the
shareholder, in the relevant year, would be liable to be taken as deemed dividend.( AY. 2009-2010)
Sunil Kapoor .v. CIT (2015) 375 ITR 1 / 235 Taxman 279 (Mad.)(HC)

S. 2(22)(e):Deemed dividend - Loan to shareholder by closely held company-Assessee managing
director of company and also partner of firm - Firm acting as agent of company-Amount
advanced by firm to assessee-Firm had independent existence-No evidence that funds of
company were used for advance-Amount not assessable as deemed dividend.
Held, dismissing the appeal, that the Tribunal held that there was no material on record to show that
the funds of the company were utilised by the firm to advance the loan to the assessee. The firm had
advanced Rs.1,88,96,202 out of the total available funds of more than Rs. 60 crores; which belonged
to different parties though available with it, i.e. the firm. The factual findings did not disclose any
error or infirmity. The contention that the two transactions one from S to the firm and the second from
the firm to the assessee should be treated as one, was not based on any valid justification. The firm
had a legal existence separate and independent of S. It carried on significant commercial activity and
collected substantial amounts (crores of rupees). Therefore, the finding that the two transactions, i.e.
one of advancing loan (by the firm to the assessee) and the other of the use of funds of S by the firm
being in reality one transaction was without any basis. The presumption was drawn without any
material to support the case of the Revenue that funds of the company were utilised to advance the
loan. Neither did S give him the money nor did it advance the amount to the firm. The firm had an
independent existence and it had over Rs. 60 crores in its account. It was also a matter of record that
the firm had over 290 branches or units and collections by it exceeded on an average Rs. 10 crores per
month. Therefore, it could not be legitimately held that the amount retained by the firm was for the
assessee's benefit. The amount was not assessable as deemed dividend under section 2(22)(e).(AY.
1992-1993)
CIT .v. Subrata Roy (2015) 375 ITR 207/278 CTR 176 / 231 Taxman 42 (Delhi)(HC)
Editorial: SLP of revenue was dismissed, CIT v. Subrata Roy (2016) 236 Taxman 396 (SC)

S. 2(22)(e): Deemed dividend – Loan by firm- loan by company- Cannot be assessed as deemed
dividend.
Advance given to the assessee by a partnership firm which was doing business as an agent of the
company in which the assessee was managing director could not be assessed as deemed dividend in
the hands of the assessee. The finding that the two transactions i.e. one of advancing a loan (by the
firm to the assessee) and the other of the use of company funds by the firm, are in reality one
transaction is without any basis. Appeal of revenue was dismissed.(AY. 1992-93)
CIT .v. Subrata Ray (2015) 375 ITR 207 / 231 Taxman 42 / 119 DTR 113/ 278 CTR 176 (Delhi)
(HC)

S. 2(22)(e): Deemed dividend –Trade advance-Cannot be assessed as deemed dividend.
Where an advance is given to a shareholder holding 10% or more voting power or to a concern in
which such shareholder has substantial interest which is in the nature of a trade advance to give effect
to commercial transactions, such an advance would not fall within the ambit of provisions of S.
2(22)(e). (AY. 2002-03 to 2007-08)
Bagmane Constructions (P.) Ltd. v. CIT (2015) 119 DTR 49 / 231 Taxman 260 / 277 CTR 338
(Karn.)(HC)
CIT v. Chandra Developers (P.) Ltd. (2015) 119 DTR 49 / / 277 CTR 338 (Karn.)(HC)

S. 2(22)(e): Deemed dividend-Not a shareholder-Individual borrowing amounts from assessee-
Not a deemed dividend.
HK, a shareholder in PD, borrowed amounts from the assessee-company. The Assessing Officer
brought the amounts to tax under section 2(22)(e) as deemed dividend on the ground that HK had
more than 10 per cent stake in the assessee-company. The assessee contended before the
Commissioner (Appeals) that HK was a shareholder in PD and could not be considered a shareholder
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in the assessee-company, that the individual could not be considered even a beneficial shareholder of
the assessee. Both the contentions were accepted by the Commissioner (Appeals) and the Tribunal.
Held, dismissing the appeals, (i) that in the absence of any finding that HK owned shares in terms of
section 2(22)(e) or was a beneficial owner in terms of such provision-on both counts-the findings
being adverse to the revenue, no question of law arose.(AY. 1999-2000, 2000-2001, 2001-2002)
CIT (TDS) v. C.J. International Hotels P. Ltd. (2015) 372 ITR 684 / 231 Taxman 818 (Delhi.)
(HC)

S. 2(22)(e) : Deemed dividend- Not a shareholder-Not liable to tax.
Assessee was not liable to tax unless it was a shareholder. AY. 2007-08)
CIT v. Karnataka Turned Components (P.) Ltd.(2015) 229 Taxman 465 (Karn.)(HC)

S. 2(22)(e) : Deemed dividend – Current account –Subsidiary company- In the course of
business- Deeming provision is not attracted.
When both the Assessee Company and its subsidiary company maintain current accounts and the
subsidiary company advances on behalf of Assessee company for the purchase of raw materials
resulting into credit lying with the latter company and as these transactions were made during the
course of business, the deeming provision u/s. 2(22)(e) is not attracted.(AY. 1993-94)
CIT v. India Fruits Ltd. (2015) 274 CTR 67/ 228 Taxman 243 (Mag)/ 114 DTR 109 (AP) (HC)

S. 2(22)(e) : Deemed dividend –No flow of fund or any benefit-Provision would not be
applicable.
Assessee was director in company SEPL, and partner in firm 'SE'. One 'M', who was employee of
SEPL, was also proprietor of PSC. SEPL gave loan or advance to PSC on 24-10-2005. On that day
itself PSC gave a loan of said amount to SE which gave back money to SEPL on that day itself.
Tribunal concluded that section 2(22)(e) was not attracted inasmuch as transaction was a circuitous
and money which initially belonged to SEPL was returned to same company on very same day
through PSC and there was no flow of fund or any benefit from 'SEPL' to 'SE' or its partner, assesse.
On facts finding of Tribunal could not be said to be perverse and section 2(22)(e) would not be
applicable. (AY. 2006-07)
CIT v. Pravin Bhimshi Chheda (2015) 228 Taxman 340 (Mag.) (Bom.)(HC)

S. 2(22)(e) : Deemed dividend –Security deposit-Business transaction- Firm was not a
shareholder-Deposit could not be treated as deemed dividend.
Assessee-firm entered into an agreement with its sister concern to supply its generator sets against a
floating security deposit by said concern . In turn, sister concern would supply electricity to assessee
at concessional rate. AO treated security deposit as deemed dividend in hands of assessee .Since
deposit made by sister concern was a business transaction arising in normal course of business
between two concerns and assesse. Firm was not a shareholder in said company, said deposit could
not be treated as deemed dividend. (AY. 2006-07)
CIT .v. Atul Engineering Udyog (2015) 228 Taxman 295/ 125 DTR 219 (All.)(HC)

S. 2(22)(e) : Deemed dividend-Trade advance-Not a registered or beneficial shareholder- Not
liable to be assessed as deemed dividend
Assessee company received a sum from another company and on same date, assessee paid certain
amount to one 'TR' who was director of both companies. AO found that assessee showed received
amount as trade advance and amount so paid to 'TR' was utilised by him for repayment of housing
loan, accordingly AO held that 'trade advance' was nothing but loan received from company and he
made addition under section 2(22)(c). On appeal Court held that the assessee company was not a
registered or beneficial shareholder, therefore assessee was not liable to pay tax.(AY. 2005-06)
CIT .v. Printwave Services (P.) Ltd. (2015) 373 ITR 665/ 228 Taxman 378 (Mag.)(Mad.)(HC)

S. 2(22)(e) : Deemed dividend - Assessee holding more than 10% of equity capital of two private
limited companies - Lending of money not part of business of companies nor substantial part of
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business - No organised course of activity involving dealings with anyone else except for assessee
- Loan to assessee-Assessable as deemed dividend.
The Legislature has not used the expression "major part of the business" but has designedly used the
expression "substantial part of the business of the company". The expression "business" contemplates
an organised course of activity which is actually continued or contemplated to be continued with a
profit motive and not for sport or pleasure. In each case, the true test is whether the lending of money
constituted a substantial part of the business of the company. Within the purview of the exclusionary
provision, the advance or loan must be, firstly, to a shareholder; secondly, the payment must be in the
ordinary course of business; and, thirdly, the lending of money must constitute a substantial part of
the business of the company. What constitutes a substantial part of business is a question of fact.
The assessee held more than 10% of the shareholding of two private limited companies. He received
loans and advances from the two companies. Held, neither of the companies, admittedly, lent any
money to any entity, save and except to the assessee. The lending of money was not a part of the
business of the company, nor for that matter, could it constitute a substantial part of the business.
There was no organised course of activity involving dealings with anyone else, save and except for
the assessee. The assessee was, therefore, unable to establish that the exclusion was attracted.(AY.
2007-2008)
Shashi Pal Agarwal .v. CIT (2015) 370 ITR 720/229 Taxman 307 (All.)(HC)

S. 2(22)(e):Deemed dividend-Not a shareholder- Provision has to be construed strictly. If
assessee is not a shareholder of lending co, S. 2(22)(e) does not apply even if funds are ultimately
paid by Co in which assessee is a shareholder
The assessee received loan from one NS Fincon Pvt. Ltd. The Revenue seeks to tax this loan as
deemed dividend. The case of the Revenue was that one Lafin Financial Services Pvt. Limited had
advanced money to NS Fincon Pvt. Ltd. who in turn advanced money to the Assessee. The Assessee a
50% shareholder of Lafin Financial Services Pvt. Limited and in view thereof, loan advanced by NS
Fincon Pvt. Ltd. to the Assessee is to be treated as a dividend in the hands of the Assessee. It is the
admitted position that the Assesee is not a shareholder in NS Fincon Pvt. Ltd. The AO brought to tax
the amount of loan received by the Asseseefrom NS Fincon Pvt. Ltd. as deemed dividend under
Section 2 (22)(e) of the Act. This was deleted by the CIT(A) and the Tribunal. On appeal by the
department to the High Court HELD dismissing the appeal:
The submission on behalf of the Revenue made before us is that one has to look at the substance of
the transaction and that if one looks at the substance, then the Assessee would be chargeable to tax.
This is not acceptable as fiscal status have to be interpreted strictly. Section 2 (22)(e) of the Act
creates a fiction by bringing to tax an amount as dividend when the amount so received is otherwise
then dividend. On a strict interpretation of Section 2(22)(e) of the Act, unless the Assessee is the
shareholder of the company lending him money, no occasion to apply it can arise (AY. 2007-08)
CIT .v. Jignesh P. Shah(2015) 372 ITR 392/ 274 CTR 198 / 229 Taxman 302/ 114 DTR 249
(Bom.)(HC)

S. 2(22)(e) : Deemed dividend-Reimbursement by company to shareholder of payments made
for business purposes cannot be treated as deemed dividend-matter remanded.
Dismissing the appeal of revenue the Tribunal held that ; the Commissioner (Appeals) was right in
holding that the payments made by the assessee on behalf of the company for its business purposes
and the reimbursement by the company could not be treated as deemed dividend under section
2(22)(e) of the Act. Though some of the payments made using his credit card were towards his
personal expenditure such payments for personal expenditure, if reimbursed by the company, were to
be treated as loans or advances under section 2(22)(e) of the Act. The Assessing Officer could treat
only the personal expenditure reimbursed by the company to the assessee as deemed dividend under
section 2(22)(e) of the Act. Matter remanded. (AY. 2009-2010)
Dy. CIT v. Tobby Simon (2015) 40 ITR 250 (Bang.)(Trib.)

S. 2(22)(e) : Deemed dividend-Loans or advances to shareholder-Substantial interest-
Ownership of shares holder alone to be considered and not the relatives . [ S. 2(32) ]
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Dismissing the appeal of revenue the Tribunal held that in order to determine substantial interest of a
share holder it is ownership of share holder alone in company to which loan /advance has been made
by assessee company and not his or her relative or family members which determine factor. (AY.
2009-10)
ACIT v. Maharishi Ayurveda Products (P) Ltd (2015) 68 SOT 332 (URO) (Delhi)(Trib.)

S. 2(22)(e) : Deemed dividend-Reimbursement of amount paid on behalf of company- Cannot be
assessed as deemed dividend.
Assessee made payments on behalf of company using his credit card which had been reimbursed by
company, same could not be treated as deemed dividend. ( (AY. 2009 – 2010)
Dy. CIT v. Tobby Simon(2015) 155 ITD 609 (Bang.)(Trib.)

S. 2(22)(e) :Deemed dividend –Not a share holder of company-Deemed dividend not to be
assessed in hands of assessee.
The assessee was not a shareholder of hence, the amount could not be taxed in the hands of the
assessee. (AY. 2005 - 2006)
IAG Promoters and Developers P. Ltd. v. ACIT (2015) 41 ITR 1(Delhi)(Trib.)

S. 2(22)(e):Deemed dividend- loans and advances given for business transaction between the
parties does not fall within the definition of “deemed dividend”
Payments made by a company through a running account in discharge of its existing debts or against
purchases 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
deeming provisions of law contained in Section 2(22)(e) apply in such cases where the company pays
to a related person an amount as advance or a loan as such and not in any other context. The law does
not prohibit business transactions between related concerns, and, therefore, payments made in the
ordinary course of business cannot be treated as loans and advances . (AY. 2005-06)
Ishwar Chand Jindal v.ACIT (2015) 171 TTJ 436 / 70 SOT 109 (Delhi)(Trib.)

S. 2(24):Income-Editor of magazine-Award received from third person for excellence in
journalism-Not assessable as income. [S.4]
Held, the amount of Rs. 1 lakh received by the assessee as an award from B. D. Goenka Trust for
excellence in journalism being purely in the nature of a testimonial would be a capital receipt. The
causa causans in the present case was not directly relatable to the carrying on of vocation as a
journalist or as a publisher. It was directly connected and linked with the personal achievements and
personality of the person, i.e. the assessee. Further, the payment in this case was not of a periodical or
repetitive nature. The payment was also not made by an employer ; or by a person associated with the
"vocation" being carried on by the assessee ; or by a client of his. The prize money had been paid by a
third person, who was not concerned with the activities or associated with the "vocation" of the
assessee. It being a payment of a personal nature, it should be treated as capital payment, being akin to
or like a gift, which did not have any element of quid pro quo. The prize money was paid to the
assessee on a voluntary basis and was purely gratis. The amount would be a capital receipt and, hence,
not income taxable.(AY.1991-1992)
Aroon Purie .v. CIT (2015) 375 ITR 188/231 Taxman 349/ 277 CTR 1/ 118 DTR 105 (Delhi)(HC)

S. 2(28A) : Interest-Deduction at source- Additional compensation paid to the purchaser of flat
on cancellation of booking of flats is not interest- Not liable to deduct tax at source. [S.194A,
201]
Purchaser has made payment while booking the flat, however subsequently dropping out of
agreement. Builder has sold the flat to third person at higher rate and refunded the amount paid by the
purchaser and part of excess price received. Tribunal held that the excess price was interest and liable
to deduct tax at source. On appeal, allowing the appeal the Court held that Additional compensation
paid to the purchaser of flat on cancellation of booking of flats is not interest hence not liable to
deduct tax at source. (AY.2012-2013, 2013-2014)
Beacon Projects P. Ltd v. CIT (2015) 377 ITR 237/ 234 Taxman 706 (Ker.)(HC)
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