Income Tax Appellate Tribunal - Chennai
Laxmi Jewellery, Chennai vs Assessee on 11 September, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH : CHENNAI
[BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER
AND SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER]
I.T.A.No.316/Mds/2012
Assessment year : 2008-09
M/s Laxmi Jewellery vs The ACIT
65, NSC Bose road Business Circle - XI
Sowcarpet Chennai
Chennai 600 079
[PAN AAAFL 0161F ]
(Appellant) (Respondent)
Appellant by : Shri T. Banusekar, CA
Respondent by : Dr. S.Moharana, CIT/DR
Date of Hearing : 11-09-2012
Date of Pronouncement : 13-09-2012
ORDER
PER N.S. SAINI, ACCOUNTANT MEMBER
This is an appeal filed by the assessee against the order of the CIT(A)-IV, Chennai, dated 15.12.2011.
2. The only issue involved in the grounds of appeal taken by the assessee is that the CIT(A) erred in confirming the addition of ` 2.50 crores as deemed dividend u/s 2(22)(e) of the Act.
:- 2 -: I.T.A.No.316/123. The brief facts of the case are the Assessing Officer observed that Shri Ashok Kumar Jain was holding 19% shares of the company M/s Shree Laxmi Jewellery Pvt. Ltd. The said company has given loan of ` 2.50 crores to M/s Laxmi Jewellery, the assessee-firm, in which Shri Ashok Kumar Jain was having 20% share of profits. Therefore, the Assessing Officer made an addition u/s 2(22)(e) of the Act by observing that loan was given by M/s Shree Laxmi Jewellery Pvt. Ltd to the assessee's partnership firm and treated it as deemed dividend.
The Assessing Officer relied on the Board's Circular No.495 dated 23.09.1987 wherein it was stated that if the loan is given by a company to partnership concern, the same can be added in the hands of the firm.
4. On appeal before the CIT(A), the assessee claimed that the deemed dividend cannot be added in the hands of the partnership concern as the firm was not a shareholder in the company. The other argument of the A.R before the CIT(A) was that the share holding of Mr.Arun Jain was less than 10% in the company. The other argument of the assessee was that it relied on the Hon'ble Madras High Court and other High Court's decisions wherein it was held that if the partnership concern is not a shareholder of company, then it can be added only in the hands of the partners who are the shareholders of :- 3 -: I.T.A.No.316/12 the company, but not in the hands of partnership firm. The CIT(A), after considering the submissions of the assessee, has confirmed the action of the Assessing Officer by observing as under:
"7.2 I have considered the Written Submissions and the cases law relied on by the appellant. The Madras High Court's decision of Commissioner of Income-Tax Vs T.P.S.H. Selva Saroja 244 ITR 671 Madras relied on by the appellant is not on similar facts and distinguishable. In that case, Honourable Madras High Court has delivered judgement while dealing with the aspects of perquisite under. Section 17(2) and whether the surrendered credits can be treated as deemed dividend or not. In the present case before us, there is no such issue and hence the reliance placed by the Id. AR on the above cited Madras High Court case is incorrect and hence rejected. The Id. AR has relied on some other High Court's decisions. But there is a Central Board of Direct Taxes Circular No.495 dated 23.09.1987 which clearly was that if the loan is given by a company to partnership concern, then the deemed dividend under Section 222(e) is to be computed in the hands of partnership concern only and not in the hands of partners. In view of this clear Board Circular, I am of the view that the addition made by the Assessing Officer is confirmed and the arguments of the Id. AR are rejected."
5. The A.R of the assessee reiterated the submissions made before the CIT(A) and relied on the following decisions:
CIT vs Hotel Hill Top [2009] 313 ITR 116 (Raj) CIT vs Raj Kumar Singh & Co. [2007] 295 ITR 9 (All) ACIT vs Bhaumik Colour (P) Ltd [2009] 120 TTJ (Mumbai)(SB)865 CIT vs Ankitech (P) Ltd & Ors [2012] 340 ITR 14 (Del) CIT vs Gopal Clothing Co.(P) Ltd in I.T.A.No. 333/2006 CIT vs Universal Medicare (P) Ltd [2010] 324 ITR 263 (Bom.) :- 4 -: I.T.A.No.316/12
6. He submitted that in the above decisions, it has been held that addition u/s 2(22)(e) of the Act can be made in the hands of the shareholder only. He also submitted that Circular No.495 dated 23.09.1987 relied on by the Assessing Officer, has also been considered in the above decisions and it has been held that such observations are not binding on courts. Once it is found that loan or advance cannot be treated as deemed dividend in the hands of such concern which is not a shareholder which is the current legal position, such circular would be of no avail. Hence, he submitted that the orders of the lower authorities should be reversed and the appeal of the assessee should be allowed.
7. The CIT/DR, on the other hand, relied on the decision of the Hon'ble Delhi High Court in the case of CIT vs Bharti Overseas Trading Co., reported in [2012] 21 Taxmann.com 543(Del), wherein following its own decision in the case of CIT vs National Travel Services [2011] 14 Taxmann.com 14(Del), the Hon'ble High Court held that the partnership firm which had purchased shares of company through its partners, though not registered shareholder, being beneficial owner, was to be treated as shareholder for the purposes of section 2(22)(e) of the Act.
:- 5 -: I.T.A.No.316/128. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. The undisputed facts in the instant case are that during the year under consideration the assessee-firm received a loan of ` 2.50 crores from M/s Shree Laxmi Jewellery Pvt. Ltd wherein one of the partners Shri Ashok Kumar Jain, who was having 20% share of profits in the firm was also a 19% shareholder of the company M/s Shree Laxmi Jewellery Pvt. Ltd. The Assessing Officer, by invoking the provisions of section 2(22)(e) of the Act taxed the amount of loan of ` 2.50 crores received by the assessee-firm as deemed dividend which was confirmed in appeal by the CIT(A) relying upon CBDT Circular No.495 dated 23.09.1987.
9. We find that in the instant case, it is not in dispute that the assessee-firm is neither a registered shareholder nor a beneficial shareholder of the company M/s Shree Laxmi Jewellery Pvt. Ltd. from which it has received a loan of ` 2.50 crores. The issue which requires our adjudication is that whether in the hands of such non-shareholder deemed dividend u/s 2(22)(e) of the Act can be assessed or not. We find that the Mumbai Special Bench of the Tribunal in the case of ACIT vs Bhaumik Colour (P) Ltd [2009] 313 ITR (AT) 146 (Mum)(SB) has held as under:
:- 6 -: I.T.A.No.316/12"We have considered the rival submissions. The historical background of section 2(22)(e) is as follows :
(a) Section 2(6A)(e) of the Indian Income-tax Act, 1922, as introduced by the Finance Act, 1955, corresponding to section 2(22)(e) of the Income- tax Act, 1961, was as follows :
" any payment by a company, not being a company in which the public are substantially interested within the meaning of section 23A, of any sum (whether as representing a part of the assets of the com- pany or otherwise) by way of advance or loan to a shareholder, or any payment by any such company on behalf, or for the individual benefit of a shareholder, to the extent to which the company in either case possesses accumulated profits."
(b) Section 2(22) of the Income-tax Act, 1961 defines dividend. Section 2(2)(e) of the Act, which is equivalent to section 2(6A)(e) of the 1922 Act, as it existed originally in the Income-tax Act, 1961, read as follows :
" Section 2(22) ` dividend` includes,-. . .
(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as represent ing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder, being a person who has a sub- stantial interest in the company, or any payment by any such com- pany on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits."
(c) The aforesaid clause (e) of the Act has been amended with effect from April 1, 1988, the amended clause (e) of the Act reads as follows :
"(e) 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 May 31, 1987, by way of advance or loan to a shareholder, being a person who is the 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 mem- ber 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 :- 7 -: I.T.A.No.316/12 shareholder, to the extent to which the company in either case possesses accumulated profits."
Explanation 3 to section 2(22)(e) is as follows :
` Explanation 3.-For the purpose of this clause,-
(a) " concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company.
(b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent. of the income of such concern.` "
Section 2(32) defines the expression " person who has a substantial interest in the company" , in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent. of the voting power.
Under the 1922 Act, two categories of payment were considered as dividend, viz., (a) any payment by way of advance or loan to a shareholder was considered as dividend paid to shareholder or (b) any payment by any such company on behalf, or for the individual benefit, of a shareholder was considered as dividend.
In the 1961 Act, the very same two categories of payment were considered as dividend but an additional condition that payment should be to a shareholder being a person who is the beneficial owner of shares and who has a substantial interest in the company, viz., shareholding which carries not less than twenty per cent. of the voting power, was introduced.
By the 1987 amendment with effect from April 1, 1988, the condition that payment should be to a shareholder who is the 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 was substituted. Thus, the percentage of voting power was reduced from twenty per cent. to ten per cent. By the very same amendment a new category of payment was also considered as dividend viz., payment to any concern in which such shareholder is a member or a partner and in which he has a substantial interest. Substantial interest has been defined to mean holding of shares carrying 20 per cent. of voting power. The provisions of section 2(22)(e) creates a fiction bringing in amounts paid :- 8 -: I.T.A.No.316/12 otherwise than as dividend into the net of dividends. Therefore, this clause must be given a strict interpretation as held by the honourable Supreme Court in the case of CIT v. C. P. Sarathy Mudaliar [1972] 83 ITR 170. In the case of the assessee as well as the intervener, there is no dispute that the companies which gave the loan or advance were one in which public are not substantially interested. Nor is there any dispute that these companies possess accumulated profits to the extent of the loan or advance. The three limbs of section 2(22)(e) are as follows :
" 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 May 31, 1987, by way of advance or loan.
first limb :-
(a) to a shareholder, being a person who is the 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.
second limb :-
(b) 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).
third limb :-
(c) 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."
In the case of CIT v. C. P. Sarathy Mudaliar [1972] 83 ITR 170 (SC), the provisions of section 2(6A)(e) of the Act, 1922, which was synonymous to section 2(22)(e) of the Income-tax Act, 1961 came up for consideration. In the said case, members of a Hindu undivided family acquired shares in a company with the fund of the family. Loans were granted to the Hindu undivided family and the question was whether the loans could be treated as dividend income of the family falling within section 2(6A)(e) of the Act, 1922. The apex court held that only loans advanced to shareholders could be deemed to be dividends under section 2(6A)(e) of the Act, the Hindu undivided family could not be considered to be a " shareholder" under section 2(6A)(e) of the :- 9 -: I.T.A.No.316/12 Act and hence, loans given to the Hindu undivided family will not be considered as loans advanced to " shareholder" of the company and could not, therefore, be deemed to be its income.
The apex court further held that when the Act speaks of shareholder it refers to the registered shareholder.
The aforesaid decision of the apex court in the case of C. P. Sarathy Mudaliar [1972] 83 ITR 170 has been followed by the apex court in the case of Rameshwarlal Sanwarmal v. CIT [1980] 122 ITR 1. In this case, the com- pany advanced the loans to the assessee-Hindu undivided family who was the beneficial owners of the shares in the company, but the shares were registered in the name of the individual karta, who held the shares for and on behalf of the Hindu undivided family. On the above facts, the question before the Supreme Court was whether the loans advanced to the Hindu undivided family-the beneficial owner of the shares-would be taxed as deemed dividend in the hands of the Hindu undivided family. The Supreme Court held that the Hindu undivided family being only the beneficial shareholder and not a registered shareholder would not fall within the purview of section 2(6A)(e) of the 1922 Act. The apex court observed as follows (page 8) :
"What section 2(6A)(e) is designed to strike at is advance or loan to a ` shareholder` and the word ` shareholder` can mean only a registered shareholder. It is difficult to see how a beneficial owner of shares whose name does not appear in the register of shareholders of the company can be said to be a ` shareholder` . He may be beneficially entitled to the share but he is certainly not a ` shareholder` . It is only the person whose name is entered in the register of the shareholders of the company as the holder of the shares who can be said to be a shareholder qua the company and not the person beneficially entitled to the shares. It is the former who is a ` shareholder` within the matrix and scheme of the company law and not the latter. We are, therefore, of the view that it is only where a loan is advanced by the company to a registered shareholder and the other conditions set out in section 2(6A)(e) are satisfied that the amount of the loan would be liable to be regarded as ` deemed dividend` within the meaning of section 2(6A)(e)."
It is thus clear from the aforesaid pronouncement of the Hon'ble Supreme Court that to attract the first limb of the provisions of section 2(22)(e) the payment must be to a person who is a registered holder of shares. As already mentioned the condition under the 1922 Act and the 1961 Act regarding the payee being a shareholder remains the same and it is the condition that such shareholder should be beneficial owner of the shares and the :- 10 -: I.T.A.No.316/12 percentage of voting power that such shareholder should hold that has been prescribed as an additional condition under the 1961 Act. The words " shareholder" alone existed in the definition of dividend in the 1922 Act. The expression "
shareholder" has been interpreted under the 1922 Act to mean a registered shareholder. This expression " shareholder" found in the 1961 Act has to be, therefore, construed as applying only to registered shareholder. It is a principle of interpretation of statutes that where once certain words in an Act have received a judicial construction in one of the superior courts, and the Legislature has repeated them in a sub- sequent statute, the Legislature must be taken to have used them accord- ing to the meaning which a court of competent jurisdiction has given them. In the 1961 Act, the word " shareholder" is followed by the following words " being a person who is the beneficial owner of shares" . This expression used in section 2(22)(e) both in the 1961 Act and in the amended pro- visions with effect from April 1, 1988, only qualifies the word " share- holder" and does not in any way alter the position that the shareholder has to be a registered shareholder. These provisions also do not substitute the aforesaid requirement to a requirement of merely holding a beneficial interest in the shares without being a registered holder of shares. The expression " being" is a present participle. A participle is a word which is partly a verb and partly an adjective. In section 2(22)(e), the present participle " being" is used to describe the noun shareholder like an adjective. The expression " being a person who is the beneficial owner of shares" is therefore a further requirement before a shareholder can be said to fall within the parameters of section 2(22)(e) of the Act.
In the 1961 Act, sec- tion 2(22)(e) imposes a further condition that the shareholder has also to be the 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. It is not possible to accept the contention of the learned Departmental representative that under the 1961 Act there is no requirement of a shareholder being a registered holder and that even a beneficial ownership of shares would be sufficient.
The expression " shareholder being a person who is the beneficial owner of shares" referred to in the first limb of section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a regis- tered shareholder but not the beneficial shareholder then the provisions of section 2(22)(e) will not apply. Similarly if a person is a beneficial share- holder but not a registered shareholder then also the first limb of the pro- visions of section 2(22)(e) will not apply.:- 11 -: I.T.A.No.316/12
The new category of payment which was considered as dividend intro- duced by the Finance Act, 1987, with effect from April 1, 1988, by the second limb of section 2(22)(e) is payment " to any concern in which such shareholder is a member or a partner and in which he has a substantial interest" . It is this category of payment with which we are concerned in this reference. The following conditions are required to be satisfied for application of the above category of payment to be regarded as dividend. They are :
" (a) There must be a payment to a concern by a company.
(b) A person must be a shareholder of the company being a registered holder and beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to par- ticipate in profits) holding not less than ten per cent. of the voting power. This is because of the expression ` such shareholder` found in the relevant provision. This expression only refers to the shareholder referred to in the earlier part of section 2(22)(e), viz., a registered and a beneficial holder of shares holding 10% voting power. The Hon'ble Rajasthan High Court in the case of Union of India v. Wazir Singh, AIR 1980 Raj 252, while dealing with an expression ` no such application` in the context of rule 97 of the Rajasthan High Court Rules, 1952 has held as follows :
'Generally the word " such" refers only to previously indicated, characterized or specified. " Such" is an adjective meaning the one previously indicated or refers only to something which has been said before.' The hon` ble Allahabad High Court in the case of Mohan Lal v. Grain Chambers Ltd., AIR 1959 All 276, has held as follows :
` In fact it appears to us that the word " such" is used before a noun in a later part of a sentence, the proper construction in the English language is to hold that the same noun is being used after the word " such" with all its characteristics which might have been indicated earlier in the same sentence.`
(c) The very same person referred to in (b) above must also be a member or a partner in the concern holding substantial interest in the concern, viz., when the concern is not a company, he must at any time during the previous year, be beneficially entitled to not less than twenty per cent. of the income of such concern;
and where the concern is a company he must be the owner of shares, not being shares entitled to a fixed rate of dividend :- 12 -: I.T.A.No.316/12 whether with or without a right to participate in profits, carrying not less than twenty per cent. of the voting power.
(d) If the above conditions are satisfied then the payment by the company to the concern will be dividend."
In the case of the assessee it is seen that conditions (b) and (c) are not satisfied inasmuch as NNT held shares in UPPL and BCPL only as a legal and registered owner but not as a beneficial owner. In the case of the assessee it is seen that the three trustees of NNT held shares in UPPL and BCPL only as a legal and registered owner. They held shares for and on behalf of 5 beneficiaries of the trust who are different individuals. They were therefore not beneficial owners of the shares. Trust ownership is a peculiar instance of duplicate ownership. Trust property is, in fact, owned by two persons simultaneously in the sense that one is under an obligation to use the property for the benefit of the other. The ownership of the trustee called trust ownership is nominal rather than real. The beneficiary interest is called the beneficial interest. The trustee is to administer the property of another person but the ownership right in the trustee is to be used only on behalf of the real owner. As between trustee and third party ownership conferred on the trustee fictitiously by law prevails, that is, the trustee is clothed with the rights of the beneficiary and is so enable to personate or represent him in dealings with the world at large. The main purpose of trusteeship is to protect the rights and interest of person who for any reason are unable effectively to protect them for themselves. Such protection is required for four classes of people. (a) unborn persons ; (b)infants, lunatics, or other disqualified persons; (c) a large number of per- sons who are interested in common ; and (d) persons having conflicting interest in the same property, i.e., an owner and an encumbrancer ordifferent kinds of encumbrancers. Therefore the first requirement of holding of shares both as a legal registered owner and beneficial owner of such shares is not satisfied in the case of the assessee. Therefore, the provisions of section 2(22)(e) would not be applicable at all to the case of the assessee.
The answer to the second question referred to the Special Bench is that the expression " shareholder" referred to in section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of section 2(22)(e) will not apply. Similarly, if a person is a beneficial share- holder but not a registered shareholder then also the provisions of section 2(22)(e) will not apply.
:- 13 -: I.T.A.No.316/12In view of the fact that the assessee was not holding beneficial interest in the shares of BPCL and UPPL, there is no requirement of answering the first question that arises for consideration in the case of the assessee, viz., as to whether deemed dividend under section 2(22)(e) of the Income-tax Act, 1961, can be assessed in the hands of a person other than a share- holder of the lender ? However, in the case of the intervener, viz., Asst. CIT, Panipat Circle, Panipat v. M/s. Weaveland, I. T. A. No.5036/Del/2008, this question needs to be answered. The facts in the case of the intervener have already been narrated earlier and are not being repeated here.
At the outset, it has to be mentioned that the provisions of section 2(22)(e) which brought in a new category of payment which was to be considered as dividend as introduced by the Finance Act, 1987, with effect from April 1, 1988, viz., payment by a company " to any concern in which such shareholder is a member or a partner and in which he has a substantial interest"
do not say as to in whose hands the dividend has to be brought to tax, whether in the hands of the " concern" or the " share- holder" . We have already seen the divergent views on this issue which have been referred to in the earlier part of this order.
The above provisions were subject matter of consideration before the hon` ble Rajasthan High Court in the case of CIT v. Hotel Hilltop [2009] 313 ITR 116. The facts of the case before the hon` ble court were as follows. The assessee was one M/s. Hotel Hilltop a partnership firm. This firm received an advance of Rs. 10 lakhs from a company M/s. Hilltop Palace Hotels (P.) Ltd. The shareholding pattern of M/s. Hilltop Palace Hotels (P.) Ltd., was as follows :
1. Shri Roop Kumar Khurana : 23.33%
2. Smt. Saroj Khurana : 4.67%
3. Vikas Khurana : 22%
4. Deshbandhu Khurana : 25%
5. Shri Rajiv Khurana : 25% The constitution of the firm Hotel Hill Top was as follows :
1. Shri Roop Kumar Khurana: 45%
2. Shri Deshbandhu Khurana: 55% The Assessing Officer assessed the sum of Rs. 10 lakhs as deemed dividend under section 2(22)(e) of the Act in the hands of the firm because the two partners of M/s. Hotel Hilltop were holding shares by which they had 10% voting power in M/s.:- 14 -: I.T.A.No.316/12
Hilltop Palace Hotels (P.) Ltd. they were also entitled to 20% of the income of the firm M/s. Hotel Hilltop. There- fore, the loan by M/s. Hilltop Palace Hotels (P) Ltd. to the firm M/s. Hotel Hilltop was treated as deemed dividend in the hands of M/s. Hotel Hilltop, the firm under the second limb of section 2(22)(e) of the Act. The Com- missioner of Income-tax (Appeals) held that since the firm was not the shareholder of the company the assessment as deemed dividend in the hands of the firm was not correct. The order of the Commissioner of Income-tax (Appeals) was confirmed by the Tribunal. On the Revenue` s appeal before the hon` ble High Court, the following question of law was framed for consideration (page 117 of 313 ITR) :
" Whether, on the facts and in the circumstances of the case and in law, the learned Tribunal was justified in upholding the order of the learned Commissioner of Income-tax (Appeals) deleting the addition of Rs. 10 lakhs as deemed dividend under section 2(22)(e) of the Income-tax Act ?"
The hon`ble court held as follows (page 119 of 313 ITR) :
" The more important aspect, being the requirement of section 2(22)(e) is that ` the payment may be made to any concern, in which such shareholder is a member or partner and in which he has sub- stantial interest or any payment by any such company on behalf or for the individual benefit of any such shareholder . . .` Thus, the sub- stance 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 the amount is paid by the company whether to the shareholder or to the concerned firm. In which event, it would fall within the expression ` deemed dividend` . Obviously, income from dividend is taxable as income from the other sources under section 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 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 individual, on whose behalf or on whose individual benefit being such shareholder the amount is paid by the company to the concern.:- 15 -: I.T.A.No.316/12
Thus, the significant requirement of section 2(22)(e) is not shown to exist. The liability of tax, as deemed dividend could be attracted in the hands of the individuals being the shareholders and not in the hands of the firm."
The aforesaid decision of the hon` ble Rajasthan High Court which is the only decision of the High Court, should be sufficient to answer question No. 2 which has been referred to the Special Bench by holding that deemed dividend can be assessed only in the hands of the person, who is a shareholder of the lender company and not in the hands of a person other than a shareholder. The argument of the learned Departmental representative that the hon`ble Rajasthan High Court did not deal with the second limb of section 2(22)(e) of the Act is not correct.
We may also touch upon certain other aspects of the issue in the light of the submissions made before us. The Tribunal in the case of Nikko Technologies (supra), while holding that the payment made by a company even to a non-shareholder can be brought to tax in the hands of the non- shareholder has made the following observations.
" Section 2(22)(e) only specifies the circumstances under which a payment by way of loan/advance is to be treated as deemed dividend. Once it is determined that any payment by way of loan/advance falls within the ambit of section 2(22)(e), then, it has to be treated as dividend even though such payment in the ordinary circumstances may not be considered as dividend. At this point of time, the role of section 2(22)(e) ends. It nowhere provides as to who is to be taxed in inspect of such income. It is to be borne in mind that the tax can only be assessed in the hands of right person as held by the apex court in the case of ITO v. Ch. Atchaiah [1996] 218 ITR 239, at pages 243-244. In order to find out the right person, one has to examine the charg- ing provisions of the Act. Sections 4 and 5 of the Act are the charging provisions. . . . "
Thereafter, the Tribunal has referred to the provisions of section 5(1) of the Act and has concluded that income accrues to the person who is the recipient of the payment from the company. The Tribunal has thereafter referred to Circular No. 495, dated September 22, 1987, of the Central Board of Direct Taxes wherein it has been opined that deemed dividend would be taxed in the hands of a concern (non-shareholder) also if the conditions mentioned in the section are satisfied.
:- 16 -: I.T.A.No.316/12We are of the view that the provisions of section 2(22)(e) do not spell out as to whether the income has to be taxed in the hands of the share- holder or the concern (non-shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the pro- visions of section 2(22)(e) of the Act.
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 tax- able in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholder 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 pro- visions of section 2(22)(e) is to tax dividend in the hands of shareholder. 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 loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. 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) of the Act by the Finance Act, 1987, with effect from April 1, 1988, is to ensure that per- sons 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 company and the concern is the basis on which these provisions have been made. It is there- fore proper to construe those provisions as contemplating a charge to tax in the hands of the shareholder and not in the hands of a non- shareholder viz., concern. A loan or advance received by a concern is not in the nature of income. In other words there is a 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 :- 17 -: I.T.A.No.316/12 income. Therefore, the deeming fiction can be applied only in the hands of the shareholder and not the non-shareholder, viz., the concern.
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 advances 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 operate. If the definition of " dividend"
is extended to a loan or 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) and in the absence of indication in section 2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a non-shareholder cannot be taxed as deemed dividend in the hands of a non-shareholder.
The basic characteristic of dividend as held by the apex court in the case of Kantilal Manilal v. CIT [1961] 41 ITR 275 is a share of profits of the com- pany given to its shareholders. Further, section 206 of the Companies Act, 1956, prohibits payment of dividend to any person other than the registered shareholder. If one were to break up the natural meaning the following components emerge (a) dividend is a share of profits of the company (b) paid to its shareholders. Section 2(22) of the Act artificially extends the scope of dividend from being more than only a distribution of profits to cover certain other types disbursements such as loans paid, etc. (the first ingredient mentioned above). It does not however alter the second com- ponent of its natural meaning, viz., paid to its shareholder. In other words all that section 2(22) seeks to do is to expand the various types payments that may be regarded as dividend. The apex court while considering what can come within the artificial definition of dividend under section 2(22) in the case of CIT v. Nalin Behari Lall Singha [1969] 74 ITR 849 (SC) described the scope of the definition of dividend thus (page 851 of 74 ITR) ::- 18 -: I.T.A.No.316/12
" The definition is, it is true, an inclusive definition and a receipt by a shareholder which does not fall within the definition may possibly be regarded as dividend within the meaning of the Act unless the context negatives that view."
The contention of the Departmental representative that the provisions of section 8(a) of the Act creates a fiction by which even payments to non- shareholders can be construed as dividend cannot be accepted. Those pro- visions merely fix the year in which dividend has to be taxed. It is therefore clear that the shareholder alone can, if at all, be subjected to tax for having earned dividend.
In the decision of the Tribunal in the case of Nikko Technologies Ltd. (supra) reliance has been placed on Circular No. 495, dated September 22, 1987 ([1987] 168 ITR (St.) 87), which states as follows (page 91) :
"Further, deemed dividend would be taxed in the hands of a concern where all the following conditions are satisfied. . . ."
We are of the view that circular of the Central Board of Direct Taxes to the extent that they do not tone down the rigor of the provisions of the Act in the sense to the extent they are not benevolent are not binding. Apart from the above, it is also noticed that section 2(22)(e)(iii) provides relief to a shareholder as follows :
" Dividend does not include,-. . .
(iii) any dividend paid by a company which is set off by the com-
pany against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e) to the extent to which it is so set off."
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 cannot be allowed to the concern, because the concern can never receive dividend from the company which is only paid to the shareholder, who has substantial interest in the concern. The above provisions also therefore contemplate deemed dividend being taxed in the hands of a shareholder only. For the reasons stated above, we are of the view that the law laid down in the case of Nikko Technologies Ltd. (supra) is not correct. We, therefore, hold that deemed dividend under section 2(22)(e) of the Income-tax Act, 1961, can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other person.
:- 19 -: I.T.A.No.316/12In the light of the above discussion, the questions referred to the Special Bench are answered as follows :
On the first question : Deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder.
On the second question : The expression shareholder referred to in section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of section 2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the provisions of section 2(22)(e) will not apply.
In view of the above discussion, there is no merit in this appeal by the Revenue and the same is, therefore, dismissed.
The order pronounced on this November 19, 2008."
10. Further, the Hon'ble Rajasthan High Court in the case of CIT vs Hotel Hill Top [2009] 313 ITR 116 (Raj) has held as under:
"Long drawn arguments were made on either side. However, before pro- ceeding further, we may gainfully quote the provisions of section 2(22)(e), which read as under :
"2.(22)(e) 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 share holder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or with out 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 (here- after 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 ;":- 20 -: I.T.A.No.316/12
From a reading of the above provision, it is clear that it comprehends manifold requirements, the first being the payment should be made by way of loan or advance to the concern. Of course on this aspect, the conclusion has been recorded by the Tribunal against the Revenue but then on a bare reading of the agreement and considering the totality of circumstances including the very nature of the term "security" and the fact that substantial portion of this Rs. 10 lakhs of amount, say more than Rs. 9 lakhs, have been advanced only during January 7, 1991, to March 22, 1991, it is difficult to accept it as a security in the sense of the term as comprehended in the agreement rather it clearly appears to be simply a nomenclature used to borrow the words of the Assessing Officer "transparent cover". Be that as it may.
The more important aspect, being the requirement of section 2(22)(e) is that "the payment may be made to any concern, in which such shareholder is a member or partner and in which he has substantial interest or any 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 the amount is paid by the company whether to the shareholder or to the concerned firm. In which event, it would fall within the expression "deemed dividend". Obviously, income from dividend is taxable as income from other source under section 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 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.
Thus, the significant requirement of section 2(22)(e) is not shown to exist. The liability of tax as deemed dividend could be attracted in the hands of the individuals being the shareholders and not in the hands of the firm.":- 21 -: I.T.A.No.316/12
11. Still further, the Hon'ble Delhi High Court in the case of CIT vs Ankitech (P) Ltd & Ors [2012] 340 ITR 14(Del) has held as under:
"We have seriously deliberated on the aforesaid arguments advanced by the counsel for the Revenue.
In so far as the provisions of section 2(22)(e) are concerned, we have already extracted this provision and taken note of the conditions/requisites which are to be established for making the provision applicable. In CIT v. C. P. Sarathy Mudaliar [1972] 83 ITR 170 (SC), the Supreme Court had traced out the assessee of this provision in the following manner :
"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.
first limb
(a) to a shareholder, being a person who is the 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 percent. of the voting power, second limb
(b) or to my 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) third limb
(c) 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."
It is rightly pointed out by the Bombay High Court in Universal Medicare (P) Ltd. [2010] 324 ITR 263 (Bom) that section 2(22)(e) of the Act is not artistically worded. Be as it may, we may reiterate that as per this provision, the following conditions are to be satisfied :
(1) The payer company must be a closely held company. (2) It applies to any sum paid by way of loan or advance during the year to the following persons :
(a) A shareholder holding at least 10 of voting power in the payer company.:- 22 -: I.T.A.No.316/12
(b) A company in which such shareholder has at least 20 per cent. of the voting power.
(c) A concern (other than a company) in which such shareholder has at least 20 per cent. interest.
(3) The payer company has accumulated profits on the date of any such payment and the payment is out of accumulated profits.
(4) The payment of loan or advance is not in course of ordinary business activities.
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 nonmembers. The second category specified under section 2(22)(e) of the Act, viz., a concern (like the assessee :- 23 -: I.T.A.No.316/12 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.
In a case like this, the recipient would be a shareholder by way of deeming provision. It is not correct on the part of the Revenue to argue that if this position is taken, then the income "is not taxed at the hands of the recipient". Such an argument based on the scheme of the Act as projected by the learned counsel for the Revenue on the basis of sections 4, 5, 8, 14 and 56 of the Act would be of no avail. Simple answer to this argument is that such loan or advance, in the first place, is not an income. Such a loan or advance has to be returned by the recipient to the company, which has given the loan or advance.
Precisely, for this very reason, the courts have held that if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend under section 2(22)(e) of the Act.
In so far as reliance upon Circular No. 495, dated September 22, 1987, issued by the Central Board of Direct Taxes is concerned, we are inclined to agree with the observations of the Mumbai Bench decision in Bhaumik Colour (P) Ltd. [2009] 313 ITR (AT) 146 (Mumbai) [SB] that such observations are not binding on the courts. Once it is found that such loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not a shareholder, and that, according to us, is the correct legal position, such a circular would be of no avail.
No doubt, the legal fiction/deemed provision created by the Legislature has to be taken to "logical conclusion" as held in Andaleeb Sehgal [2010] 173 DLT 296 (Delhi) [FB]. The Revenue wants the deeming provision to be extended which is illogical and the attempt is to create a real legal fiction, which is not created by the Legislature. We say at the cost of repetition that the definition of shareholder is not enlarged by any fiction. "
:- 24 -: I.T.A.No.316/1212. Thus, from the reading of the above decisions which were rendered after taking into consideration the CBDT Circular No.495 dated 23.09.1987, it is clear that deemed dividend u/s 2(22)(e) of the Act can be assessed only in the hands of a person who is a registered shareholder as well as beneficial shareholder of more than specified percentage and in the specified circumstances. The provisions of section 2(22)(e) of the Act, being a 'deeming' provision, requires to be construed strictly within the parameters specified by the legislation.
Thus, in our considered view, the assessee-firm, not being a shareholder, registered or beneficial, of M/s Shree Laxmi Jewellery Pvt.
Ltd., the loan amount of ` 2.50 crores cannot be assessed as deemed dividend in the hands of the assessee-firm.
13. The CIT/DR relied upon the decision of the Hon'ble Delhi High Court in the case of CIT vs Bharti Overseas Trading Co. (supra) which is found to be distinguishable on facts and not applicable on the facts of the instant case. In that case, before the Hon'ble Delhi High Court it was found that the assessee-firm was beneficial shareholder of the company from which it received loans or advances but in the instant case it is observed that the assessee-firm is not beneficial shareholder of the shares of M/s Shree Laxmi Jewellery Pvt. Ltd and therefore, the said decision is not applicable in the instant case.
:- 25 -: I.T.A.No.316/1214. We, therefore, delete the addition of ` 2.50 crores and allow the grounds of appeal of the assessee.
15. In the result, the appeal of the assessee is allowed.
Order pronounced on , the day of September,
2012, at Chennai.
Sd/- Sd/-
(SATBEER SINGH GODARA) (N.S.SAINI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 13th September, 2012
RD
Copy to: Appellant/Respondent/CIT(A)/CIT/DR