Delhi High Court
Commissioner Of Income Tax vs Commissioner Of Income Tax on 11 July, 2011
Author: A.K.Sikri
Reportable
* IN THE HIGH COURT OF DELHI AT NEW DELHI
ITA 223 OF 2010
ITA 219 OF 2010
ITA 1204 OF 2010
ITA 309 OF 2011
%
Judgment Reserved on: 24.5.2011
Judgment delivered on: 11.07.2011
(1) ITA No.223 of 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
Through: Ms. Prem Lata Bansal, Sr.
Advocate with Mr. Ruchir Bhatia,
Advocate.
Mr. Kiran Babu, Advocate
Mr. Kamal Sawhney, Sr.
Standing Counsel.
VERSUS
M/S NATIONAL TRAVEL SERVICES . . .RESPONDENT
Through: Mr. M.S. Syali, Sr. Advocate with
Mr. U.A. Rana, Mr. Mrinal
Mazumdar and Ms. Husnal Syali
Advocates.
(2) ITA 219 OF 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
Through: Ms. Prem Lata Bansal, Sr.
Advocate with Mr. Ruchir Bhatia,
Advocate.
Mr. Kiran Babu, Advocate
Mr. Kamal Sawhney, Sr.
Standing Counsel.
VERSUS
M/S NATIONAL TRAVEL SERVICES . . .RESPONDENT
Through: Mr. M.S. Syali, Sr. Advocate with
Mr. U.A. Rana, Mr. Mrinal
Mazumdar and Ms. Husnal Syali
Advocates.
ITA 223/2010,219/2010,1204/2010,309/2011
Page 1 of 28
(3) ITA 1204 OF 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
Through: Ms. Prem Lata Bansal, Sr.
Advocate with Mr. Ruchir Bhatia,
Advocate.
Mr. Kiran Babu, Advocate
Mr. Kamal Sawhney, Sr.
Standing Counsel.
VERSUS
M/S NATIONAL TRAVEL SERVICES . . .RESPONDENT
Through: Mr. M.S. Syali, Sr. Advocate with
Mr. U.A. Rana, Mr. Mrinal
Mazumdar and Ms. Husnal Syali
Advocates.
(4) ITA 309 OF 2011
COMMISSIONER OF INCOME TAX . . . APPELLANT
Through: Ms. Prem Lata Bansal, Sr.
Advocate with Mr. Ruchir Bhatia,
Advocate.
Mr. Kiran Babu, Advocate
Mr. Kamal Sawhney, Sr.
Standing Counsel.
VERSUS
M/S NATIONAL TRAVEL SERVICES . . .RESPONDENT
Through: Mr. M.S. Syali, Sr. Advocate with
Mr. U.A. Rana, Mr. Mrinal
Mazumdar and Ms. Husnal Syali
Advocates.
CORAM:-
HON‟BLE MR. JUSTICE A.K. SIKRI
HON‟BLE MR. JUSTICE M.L. MEHTA
1. Whether Reporters of Local newspapers may be
allowed to see the Judgment?
2. To be referred to the Reporter or not?
3. Whether the Judgment should be reported in the
Digest?
ITA 223/2010,219/2010,1204/2010,309/2011
Page 2 of 28
A.K. SIKRI, J.
1. In a very recent judgment pronounced on 11th May, 2011 in a
batch of appeals with lead case entitled Commissioner of
Income Tax Vs. Ankitech Pvt. Ltd. (ITA 462/2009), this very
Bench has discussed in detail the extent and scope of the
provisions of Section 2(22) (e) of the Income-Tax Act
(hereinafter referred to as „the Act‟). This provision reads as
under:-
" dividend includes
(a) xxx xxx xxx
(b) xxx xxx xxx
(c) xxx xxx xxx
(d) xxx xxx xxx
(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 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 member or a partner and in which he has a
substantial interest (hereafter in this clause referred
to as the said concern)] or any payment by any
such company on behalf, or for the individual
benefit, of any such shareholder, to the extent to
which the company in either case possesses
accumulated profits;
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but ―dividend‖ does not include--
(i) a distribution made in accordance with sub-
clause (c) or sub-clause (d) in respect of any share
issued for full cash consideration, where the holder
of the share is not entitled in the event of liquidation
to participate in the surplus assets ;
[(ia) a distribution made in accordance with sub-
clause (c) or sub-clause (d) in so far as such
distribution is attributable to the capitalised profits
of the company representing bonus shares allotted
to its equity shareholders after the 31st day of
March, 1964, [and before the 1st day of April, 1965]
;]
(ii) any advance or loan made to a shareholder
[or the said concern] by a company in the ordinary
course of its business, where the lending of money
is a substantial part of the business of the company
;
(iii) any dividend paid by a company which is set
off by the company 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;
[(iv) any payment made by a company on
purchase of its own shares from a shareholder in
accordance with the provisions of section 77A of the
Companies Act, 1956 (1 of 1956);
(v) any distribution of shares pursuant to a
demerger by the resulting company to the
shareholders of the demerged company (whether or
not there is a reduction of capital in the demerged
company).]‖
2. This provision creates a fiction providing certain
circumstances under which certain kinds of payments made
to the persons specified therein are to be treated as deemed
dividend income. As per this provision, the following conditions
are to be satisfied:
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(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.
(b) A company in which such
shareholder has at least 20% of the
voting power.
(c) A concern (other than company) in
which such shareholder has at least
20% 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.
3. In Commissioner of Income Tax Vs. C.P. Sarathy Mudaliar
[1972] 83 ITR 170, the Supreme Court analysed the provision
and pointed out that in so far as payment by a company by
way of advance or loan is concerned, it can be made to any of
the three persons mentioned therein i.e. it had three limbs and
explained the same as under:-
―Any payment by a company, not being a company
in which the public are substantially interest, of any
sum (whether as representing a part of the assets
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of the company or otherwise) made after
31.05.19987 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, or any such
shareholder, to the extent to which the company
in either case possesses accumulated profits.‖
4. In Ankitech (supra), this Court was concerned with the
second limb and the question that arose was: when the
payment is made to "a concern" in which such share holder
is a member or partner and he has a substantial interest,
whether deemed dividend income would be treated as
income in the hands of such concern or in the hands of such
share holder? It was answered by holding that the provision
of Section 2(22)(e) of the Act are not applicable to such a
concern which has received the payment but is not a share
holder as it is the share holder who is a member or a partner
in such a company which has made the payment and that
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member or partner shall have substantial interest be treated
as receiptment of deemed dividend income. The operative
portion of that judgment reads as under:-
―25. Further, it is an admitted case that
under 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 legal fiction created under
Section 2(22)(e) of the Act. We have to keep
in mind that this legal provision relates to
―dividend‖. Thus, by a deeming provision, it is
the definition of dividend which is enlarged.
Legal fiction does not extend to ―shareholder‖.
When we keep in mind this aspect, the
conclusion would be obvious, viz., loan or
advance given under the conditions specified
under Section 2(22)(e) of the Act would also be
treated as dividend. The fiction has to stop
here and is not to be extended further for
broadening the concept of shareholders by way
of legal fiction. It is a common case that any
company is supposed to distribute the profits in
the form of dividend to its
shareholders/members and such dividend
cannot be given to non-members. The second
category specified under Section 2(22)(e) of
the Act, viz., a concern (like the assessee
herein), which is given the loan or advance is
admittedly not a shareholder/member of the
payer company. Therefore, under no
circumstance, it could be treated as
shareholder/member receiving dividend. If the
intention of the Legislature was to tax such
loan or advance as deemed dividend at the
hands of ―deeming shareholder‖, then the
Legislature would have inserted deeming
provision in respect of shareholder as well, that
has not happened. Most of the arguments of
the learned counsels for the Revenue would
stand answered, once we look into the matter
from this perspective.
ITA 223/2010,219/2010,1204/2010,309/2011
26. 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 counsels 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.
27. 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.‖
5. We may also point out that while coming to this conclusion,
this Court concurred with the same view expressed by the
Bombay High Court in Commissioner of Income Tax Vs.
Universal Medicate (P) Ltd. 190 Taxman 144 (Bom.) which
had approved the decision of the Special Bench Mumbai in
the case of ACIT Vs. Bhaumik Colour (P) Ltd. 118 ITD 1
(Mum.) (SB) and Rajasthan High Court in the case of
Commissioner of Income Tax Vs. Hotel Hilltop 217 CTR (Raj.)
527.
6. Though, in these appeals also we are concerned with the
provisions of Section 2(22)(e) of the Act, another facet of this
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provision has arisen for consideration because of which we
have to proceed further from the stage where we left at
Ankitech Pvt. Ltd. (supra).
7. The respondent/assessee is a partnership firm consisting of
three partners namely Mr. Naresh Goyal, Mr. Surinder Goyal
and M/s Jet Enterprises Pvt. Ltd. having profit sharing ratio
of 35%, 15% and 50% respectively. The assessee firm had
taken a loan of ` 28,52,41,516/- from M/s Jetair Pvt. Ltd. New
Delhi. In this company the assessee has invested by
subscribing to the equity share numbering 1,43,980 of ` 100
each which constitute 48.18%. However, the shares were
purchased in the name of the two partners namely Mr.
Naresh Goyal and Mr. Surinder Goyal. Thus, whereas, Mr.
Naresh Goyal and Mr. Surinder Goyal are the respective
share holders, the assessee is the beneficial share holder.
On these facts, in this appeal we are concerned with the
first limb [in contradiction to second limb that fell for
interpretation in Ankitech (supra)] and are called upon to
examine as to whether this first limb of Section 2(22)(e) of
the Act has been satisfied. We should point out at the
outset that it is an admitted position that all other conditions
stipulated in Section 2(22)(e) of the Act are fulfilled. The
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extent of share holding is also so high that the assessee has
indubitably substantial interest in Jetair Pvt. Ltd.
8. For attracting first limb, the requirement of the provision is
that the payment is made by a company "by way of advance
or loan to a share holder, being a person who is the
beneficial owner of shares". The question which calls for
interpretation is as to whether same is to be paid by way of
advance or loan to a share holder who is also the beneficial
owner of the shares. To put it otherwise, is it necessary
that both the conditions have to be satisfied namely such a
person to whom the payment is made is not only a
registered share holder but a beneficial share holder as well.
9. Before we proceed to answer the question, we would like to
repel the preliminary submission advanced by Mr. Syali,
learned Senior Counsel for the assessee, that this aspect is
also covered by the judgment in Ankitech (supra). Mr. Syali
ventured to make this submission emboldened by the fact
that the decision of special Bench Bombay in Bhaumik Colour
(supra) has been upheld by the Bombay High Court in
Universal Medicare (supra) and in Ankitech (supra) this Court
has concurred with the said opinions. On this basis, it was
pointed out that following observations of the Special Bench
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Mumbai in para 24 squarely answered the question posed in
these appeals which is reproduced in Ankitech (supra) also.
This para reads as under:-
―24. 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 registered
shareholder but not the beneficial then the
provision of Section 2(22)(e) will not apply.
Similarly if a person is a beneficial shareholder but
not a registered shareholder then also the first
limb of provisions of Section 2(22)(e) will not
apply.‖
10. No doubt, Ankitech (supra) affirmed the view taken by the
Special Bench in Bhaumik Colour (supra). However, the
entire judgment in Ankitech (supra) is confined to second
limb of Section 2(22)(e) of the Act and it is that aspect only,
as highlighted above as well, which was the focus of
attention and answered. No doubt, in the aforesaid para of
Bhaumik Colour (supra) Special Tribunal has commented
upon the first limb of Section 2(22)(e) of the Act as well but
the veracity thereof had not arisen for consideration as that
was not the issue involved. It is trite that the ratio of a case
is to be culled out from the question that specifically arose,
discussed and answered and not what can be logically
deduced therefrom. The issue with which we are concerned
was neither the issue nor deliberated upon. It is for this
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reason that we need to give a fresh look to this question in
the present case. It would be a different matter, whether we
ultimately agree with the aforesaid view of the Tribunal in
Bhaumic Colour (supra) or not.
11. Mr. Syali, learned Senior Counsel submitted that under the
Income Tax Act, for the purposes of Income Tax partnership
firm is different from the partners. The income earned by
the partnership firm is also assessed at the hands of the
partnership firm which is required to file its own return. The
profits distributed thereafter to the partners become income
at the hands of the partners and partners are separately
assessed under the Income Tax Act. He also referred to
various provisions of the Companies Act to buttress his
submission that the partnership firm in its own right can be
the shareholder as distinguished from the partners
themselves. Specific attention was drawn to Section 187 (c)
of the Companies Act which draws distinction between the
registered shareholder and a person holding a beneficial
interest in any share. He also referred to the guidelines
issued by the SEBI on joint share holding in respect of
partnership firm interpreting the provisions of Section 187 (c)
of the Companies Act. Vide Circular No.8/18/75-CL-V dated
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13th March, 1975. The SEBI has clarified the position in the
following manner:-
"(6) Partnership Firms.- Where in the case of
partnership firms, shares are acquired in the
names of one or more or other partners, the
partners will have to file a declaration both
under sub Section 91(i) and under sub
section (2) because they have also beneficial
interest in the shares held by them on behalf
of all the partners.
Department‟s view.- A partnership firm is not
a person capable of being a member within
the meaning of Section 41 of the Companies
Act, 1956 and since a partnership is not a
legal entity by itself but only a compendious
way of describing the partners constituting
the firm, it is necessary that the names of all
the members of the partnership firm should
be entered in the Register of Members in
order that the right of the partnership as a
whole to the shares in question may prevail.
The holding of shares by only one or more
partners on behalf of other partners of a firm
should not, therefore, ordinarily arise.
However, where in a given case, the name or
names, of only one or some of the partners is
entered in the Register of Members while the
intention is that the partnership as a whole
should have the right of membership in
respect of the shares in question, it is
obviously necessary for such partners who
hold shares not only for respect of the shares
in question, it is obviously necessary for such
partners who hold shares not only for
themselves but for the benefit of all partners
constituting the firm whose names are not
entered in the Register of Members, to
comply with the rules under Section 187C."
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12. Sub Section (2) and (7) of Section 187-C of the Companies
Act are reproduced as under:-
"S.187-C. Declaration by persons not holding
beneficial interest in any share
(1)......
(2) Notwithstanding anything contained
elsewhere in this Act, a person who holds a
beneficial interest in a share or a class of shares
of a company shall, within thirty days fro the
commencement of the Companies (Amendment)
Act, 1974, or within thirty days after his
becoming such beneficial owner, whichever is
later, make a declaration to the company
specifying the nature of his interest, particulars of
the person in whose name the shares stand
registered in the books of the company and such
other particulars as may be prescribed.
(3).....
(4).....
(5)......
(6)......
(7) Nothing in this section shall be deemed to
prejudice the obligation of a company to pay
dividend in accordance with the provisions of
Section 206, and the obligation shall, on such
payment, stand discharged
[The provision of this section shall not apply to
the trustee referred to in Section 187B on and
after the commencement of the Companies
(Amendment) Act, 2000]
13. He also referred to the provisions of Section 153 in
conjunction with Section 147 of the Companies Act. Section
150 of the Act mandates every company to keep register of
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its members and enter particulars as specified in that
provision which includes the name, address and the
occupation, if any of each member. On this basis, it was
argued that a member whose name is entered in the said
register is to be treated as „shareholder‟. Section 41 defines
„member‟ and gives the definition of „member‟ inter alia
stipulating that person who has registered his name in the
register of a company and whose name is entered in its
register of members, shall be a member of the Company.
Sub Section (3) of Section 41 deals with beneficial owner in
the following manner:-
"41. Definition of "member"
(1)....
(2)....
(3) Every person holding equity share capital
of company and whose name is entered as
beneficial owner in the records of the
depository shall be deemed to be a member of
a concerned company."
14. It was thus argued that only that beneficial owner whose
name is entered as beneficial owner in the records of the
depository, would be deemed to be a member of the
concerned company. Unless this condition is satisfied, a
beneficial owner cannot be treated as "member" or
"shareholder" of a company.
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15. Mr. Syali also relied upon the judgment of Allahabad High
Court in the case of Commissioner of Income-Tax Vs. Raj
Kumar Singh & Co. 295 ITR 9 (All) wherein the Court held
that the conditions stipulated in Clause (e) of Section 2 (22)
of the Act were not satisfied where the assessee firm was not
the shareholder of a company which gave the loan and the
partners of the firm were shareholders in the books
company. This judgment was rendered following Supreme
Court judgment in the case of Commissioner of Income Tax
Vs. C.P. Sarathy Mudaliar, 83 ITR 170 (SC). Following
observation from the said judgment was quoted by the
Allahabad High Court wherein the Supreme Court has held
that only loan advanced to shareholder could be deemed to
be dividends under Section 2 (6A) (e) of the Old Act
(corresponding to section 2 (22) (e) of the present Act):-
"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 shares but he is
certainly not a "shareholder". It is only the person
whose name is entered in the register of
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
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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 was held that Hindu Undivided Family cannot be
considered to be a share holder and the loans given to HUF could
not be considered as loans advanced to a shareholder of the
company, therefore, could not be deemed to be its income.
Referring to the aforesaid judgment, the Allahabad High Court
followed the view that since the firm was not the shareholder and
the shares were in the name of partners, the loan advanced by the
company to the firm could not be deemed to be a dividend.
Following discussion on this aspect by the Court is reproduced
below:-
"Clause (e) of Section 2(22) of the Act as it
existed clearly provide that if the loan is
received by the shareholder, it is only then the
said loan can be deemed to be dividend in his
hand. In the present case, admittedly, the
assessee firm was lot the shareholder of the
Company M./S Jai Prakash Associates (P) Ltd.
and the partners of the firm were the
shareholders in the books of the Company,
therefore, the loan advanced by the Company
to the firm cannot be deemed to be dividend
inasmuch as loan was not to the shareholder
but to the partnership firm which was not the
shareholder in the books of the Company. It is
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settled principle of law that the deeming
provision has to be construed strictly.
In the case of Howrah Trading Co. Ltd. v.
[1959]36ITR215(SC) , the Apex Court held that
a person who has purchased shares in a
company under a blank transfer and in whose
name the shares have not been registered in
the books of the company is not a
"shareholder" in respect of such shares within
the meaning of Section 18(5) of the Income
Tax Act, notwithstanding his equitable right to
the dividend on such shares, and is not,
therefore, entitled to have this dividend
income grossed up under Section 16(2) of the
Act by the addition of the Income Tax paid by
the company in respect of those shares, and
claim credit for the tax deducted at source,
under Section 18(5) of the Act. The Apex Court
held as follows:
"The word "holder of a share" are really equal
to the word "shareholder", and the expression
" holder of a share" denotes, in so far as the
company is concerned, only a person who, as
a shareholder, has his name entered on the
register of members.
The position, therefore, under the Indian
Companies Act, 1913, is quite clear that the
expression "shareholder" or "holder of a share"
in so far as that Act is concerned, denotes no
other person except a "member"....
The question that falls for consideration is
whether the meaning given to the expression
"shareholder" used in Section 18(5) of the Act
by these cases is correct. No valid reason
exists why "shareholder" as used in Section
18(5) should mean a person other than the
one denoted by the same expression in the
Indian Companies Act, 1913. In Wala Wynaad
Indian Gold Mining Company., In re (1982) 21
Ch.D. 849, 854 Chitty, J., observed:
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"I use now myself the term which is common in the
courts, 'a shareholder', that means the holder of
the shares. It is the common term used, and only
means the person who holds the shares by having
his name on the register."
Section 19A makes it clear, if any doubt existed,
that by the term "shareholder" is meant the
person whose name and address are entered in
the register of "shareholders" maintained by the
company. There is but one register maintained by
the company. There is no separate register of
"shareholders" such as the assessee claims to be
but only a register of "members". This takes us
immediately to the register of members, and
demonstrates that evens for the purpose of the
Indian Income Tax Act, the words "member" and
"shareholder" can be read as synonymous.
The words of Section 18(5) must accordingly be
read in the light in which the word "shareholder"
has been used in the subsequent sections, and
read in that manner, the present assessee,
notwithstanding the equitable right to the
dividend, was not entitled to be regarded as a
"shareholder" for the purpose of Section 18(5) of
the Act. That benefit can only go to the person
who, both in law and in equity, is to be regarded as
the owner of the shares and between whom and
the company exists the bond of membership and
ownership of a share in the share capital of the
company."
16. Coming to the merits of the issue, submission of learned
Counsel for the appellant was that language of Section 2 (22)
(e) of the Act clearly spells out that a beneficial owner is
treated as share holder under this provision. She took the
matter at the pedestal of first principles on which the
relationship of the partners vis-à-vis partnership is generally
construed. Expanding this argument, she referred to
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Sections 14,15,16 and 18 of the Partnership Act and argued
that as per these provisions, a partnership firm has no
separate entity and it is synonyms with the partners (in
contradistinction to a company incorporated under the
Companies Act which enjoys the status of an independent
legal entity and is a juristic person, separate from its
members i.e. the share holders). She thus argued that
when the shares are bought by a partnership firm (which is
admittedly a beneficial owner), for want of its own legal
entity, per force these share are to be bought in the name of
partners. However, for all intent and purposes it is a
partnership firm which would be the shareholder as well for
the purposes of Section 2(22)(e) of the Act. Otherwise,
argued the learned senior Counsel, the very purpose of this
provision would be defeated in the case of a partnership
firm, as in no case shares would be bought in the name of
partnership firm since it is not permissible in law. She
further submitted that one does not have to resort to the
provision of the Companies Act to find out who is the
shareholder. She also submitted that the Supreme Court
judgment in Mudaliar (supra) was rendered before the
amendment to Section 2(22)(e) of the Act. She also argued
that there is a difference between the HUF and the
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partnership firm which is eloquently brought out by the CIT
(A) in his order passed in ITA 1204/2010.
17. We have given our thoughtful consideration to the
submission of the counsel for both the parties. According to
us the outcome of this appeal depends on the following two
questions:-
(1) To attract the first limb of Section 2 (22)(e) of
the Act, is it necessary that the person who has
received the advance or loan is a shareholder
and also beneficial owner. To put it otherwise,
whether both the conditions are required to be
satisfied will depend upon the interpretation to
be given to the words " being a person who is a
beneficial owner of shares...." Which was
inserted by amendment in the aforesaid
provision carried out by the Finance Act, 1987
w.e.f. 1st April, 1988.
(2) Whether the assessee who is a partnership firm
can be treated as „shareholder‟ because of the
reason that it has purchased the shares in the
name of the two partners.
18. In so far as first question formulated above is concerned,
answer to that can be found in Rameshwarlal Sanwarmal Vs.
CIT 122 ITR 1 (SC) which followed the judgment in the case
of Commissioner of Income Tax Vs. C.P. Sarathy Mudaliar
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[1972] 83 ITR 170. That was a case where the assessee was
HUF which had obtained certain loans of a company whose
shares it beneficially owned. However, these shares stood in
the name of S.M. Sharia (Karta) of the said HUF in the register
of shareholders of the company. The loans were advanced by
the company to three concerns which were owned by the
assessee/ HUF. The Court held that conditions stipulated in
Section 2 (6A) (e) of the Income Tax Act, 1922 (which is akin
to Section 2 (22)(e) of the present Act) were not satisfied and
the amount of loan would not fall within the mischief of this
Section as the HUF was not the shareholder even when it was
beneficial owner of the shares. It is clear therefrom that both
the conditions have to be satisfied. This view has been
followed by the Rajasthan High Court in the case of Harish
Chand Golecha Vs. CIT, 132 LTR 30 while dealing with the
present provision contained in the Income Tax Act, 1961. The
expression ―being a person as a beneficial owner of shares‖
qualifies the word ‗shareholder'. Thus to attract the provisions
of Section 2 (22) (e) of the Act, the person to whom the loan
or advance is made should be a shareholder as well as
beneficial owner.
19. This brings us to the more important issue viz. whether the
assessee firm can be treated as a shareholder having
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purchased shares through its partners in the company which
has paid the loans or is it necessary that a shareholder has to
be a ‗registered shareholder'. If the contention of the assessee
is accepted, in no case a partnership firm can come within the
mischief of Section 2 (22) (e) of the Act because of the reason
that shares would be purchased by the firm in the name of its
partners as the firm is not having any separate entity of its
own. With the name of the partner entering into the register of
members of the company as shareholder, the said partner shall
be the ‗shareholder' in the records of the company but not the
beneficial owner as ‗beneficial owner' is the partnership firm.
This would mean that the loan or advance given by the
company would never be treated as deemed dividend either
in the hands of the partners or in the hands of partnership
firm. In this way the very purpose for which this provision was
enacted would get defeated. The object behind this provision
is succinctly stated in the Circular No. 495 of 22nd September,
1987 particularly in the Explanatory Notes to Finance Act, 1987
when this provision was amended. It reads as under:-
―With the deletion of Section 104 to 109 there
was a likelihood of closely held companies not
distributing their profits to shareholders by way
of dividends but by way of loans or advances
to that these are not taxed in the hands of the
shareholders. The forestall this manipulation,
sub -clause (3) of clause (22) of Section 2 has
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been suitably amended. Under the existing
provisions, payments by way of loans or
advance to shareholders having substantial
interest in a company to the extent to which the
company possesses a accumulated profits is
treated as dividend. The shareholders having
substantial interest are those who have a
shareholding carrying not less than 20 per cent
voting power as per the provisions of clause
(32) of Section 2. The amendment of the
definition extends its application to payments
made (i) to a shareholder holding not less than
10 per cent of the voting power, or (ii) to a
concern in which the shareholder has
substantijal interest. Concern as per the newly
inserted Explanation 3 (a) to Section 2 (22)
means a HUF or a firm or an association of
persons or a body of individuals or a company.
A shareholders having a substantial interest in a
concern as per part (b) of Explanation 3 is
deemed to be one who is beneficially entitled to
not less than 20 per cent of income of such
concern.
10.3 The new provisions would, therefore, be
applicable in a case where a shareholders has
10 per cent or more of the equality capital.
Further, deemed dividend would be taxed in the
hands of a concern where all the following
conditions are satisfied:
(i) where the company makes the payment
by way of loans or advances to a concern.
(ii) Where a member or a partner of the
concern holds 10 per cent of the voting power in
the company; and
(iii) where the member or partner of the
concern is also beneficially entitled to 20 per
cent of the income of such concern.
With a view to avoid the hardship in cases
where advances or loans have already been
given, the new provisions have been made
applicable only in cases where loans or
st
advances are given after 31 May, 1987.‖
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These amendments will apply in relation to
assessment year 1988-89 and subsequent
years.‖
20. If the contention of the assessee is accepted than the very
object for which Section 2 (22) (e) of the Act was amended
would get frustrated qua the partnership firm leading to absurd
results. It is a very well established principle of construction
that where the plain literal interpretation of a statutory
provisions produces manifestly absurd and unjust results which
could never have been intended by the Legislature, the Court
must modify the language used by the Legislature or even ―do
some violence‖ to it, so as to achieve obvious intention of the
Legislature. Reference is made to the decision of the Supreme
Court in the Case of K.P. Varghese Vs. ITO 131 ITR 597
(SC).
21. No doubt, when Section 2 (22) (e) of the Act enacts a
deeming provision, it has to be strictly construed. At the same
time, it is also trite that such a deeming provision has to be
taken to its logical conclusion. If the partnership firm which
has purchased the shares is not treated as shareholder merely
because the shares were purchased in the name of the
partners, that too because of the legal compulsion that shares
could not be allotted to the said partnership firm which is a non
legal entity, it would be impossible for such a condition to be
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fulfilled. That is not the purpose of law. The partnership firm
is synonym of the partners. As per the Circular issued by the
SEBI dated 13th March, 1975 interpreting Section 187 (c) of
the Companies Act, relied by the learned counsel for the
assessee himself, a partnership firm is not a person capable of
being a ‗member' within the meaning of Section 47 of the
Companies Act. It is further explained that since a partnership
firm is not a legal entity by itself but only a compendious way
of describing the partners constituting the firm, it is
necessary that the names of all the members of the
partnership firm should be entered in the Register of
Members. Obviously then, with the purchase of shares by
the firm in the name of its partners, it is the firm which is to
be treated as shareholder for the purposes of Section 2 (22)
(3) of the Act.
22. It would be difficult to accept the contention of Mr. Syali,
predicated on the provision of Companies Act as wherever a
partnership firm wants to come out of the rigors of Section 2
(22)(e) it can easily do so by not entering the names of all
the members of the partnership firm in the Register of
Members. In this case itself, it could be seen that Mr. Naresh
Goyal holds 44.58% of shareholding in M/s Jet Air (P) Ltd. as
a partner of the appellant firm. On the other hand, the said
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Mr. Narersh Goyal derives 35% of the profit sharing ratio in
the assessee firm. In other words, Mr. Naresh Goyal has
substantial interest in the assessee firm too. Thus, he is a
person who not only has substantial interest but also holds
sufficient influence. Since the partnership firm is the
beneficial owner and it has to per force purchase the shares
in the name of the partners, it is very easy for a person like
him to ensure that only the names of partners in whose
name shares are purchased is entered in the records of the
company and the names of all the partners are not
recorded so that provisions of Section 187C of the
Companies Act are not fulfilled. Likewise, it can also be
ensured that for the purpose of Section 41 (3) of the Act, the
name of the partnership firm is not specifically entered as
beneficial owner in the records to the depository to make
partnership firm as deemed member of the concern
company within the meaning of Section 41 (3) of the Act.
Such a situation cannot be countenanced.
23. We are, therefore, of the opinion that for the purpose of
Section 2 (22) (e) of the Act, partnership firm is to be treated
as the shareholder and it is not necessary that is has to be
"registered shareholder". We thus answer the questions
formulated in favour of the Revenue and against the
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assessee as a result, this appeal is allowed setting aside the
order of the Tribunal and restoring that of the Assessing
Officer.
(A.K. SIKRI)
JUDGE
(M.L. MEHTA)
JUDGE
JULY 11, 2011
skb
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