Delhi High Court
Commissioner Of Income Tax vs Ankitech Pvt Ltd. on 11 May, 2011
Author: A.K.Sikri
REPORTABLE
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ITA No.462 of 2009 with ITA Nos. 2087/2010, 901/2010,
902/2010, 903/2010, 960/2010, 1327/2010, 1436/2010,
1502/2010, 1865/2010, 461/2010, 998/2009, 1421/2009,
1618/2010, 1758/2010, 1978/2010, 622/2011, 623/2011,
270/20111588/2010, 211/2010, 352/2010 & 2014/2010.
Reserved On: April 27, 2011.
% Pronounced On: May 11, 2011.
1) ITA No.462 of 2009
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
ANKITECH PVT LTD. . . .RESPONDENT
2) ITA No.2087 of 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
ANKITECH PVT LTD. . . .RESPONDENT
3) ITA No.901 of 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
M/s MUKUL INTERNATIONAL LTD. . . .RESPONDENT
4) ITA No.902 of 2010
ITA No.462 of 2009 & Ors. Page 1 of 50
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
M/s MUKUL INTERNATIONAL LTD. . . .RESPONDENT
5) ITA No.903 of 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
M/s MUKUL INTERNATIONAL LTD. . . .RESPONDENT
6) ITA No.960 of 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
M/s R.C. ENERGY METERING PVT. LTD. . . .RESPONDENT
7) ITA No.1327 of 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
ACTIVE SECURITIES PVT. LTD. . . .RESPONDENT
8) ITA No.1436 of 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
ITA No.462 of 2009 & Ors. Page 2 of 50
VERSUS
P AND A ESTATES PVT. LTD. . . .RESPONDENT
9) ITA No.1502 of 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
MEHRA STORE . . .RESPONDENT
10) ITA No.1865 of 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
MOKUL INTERNATIONAL LTD. . . .RESPONDENT
11) ITA No.461 of 2011
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
COSMOTECH COMMUNICATIONS PRODUCTS PVT. LTD.
. . .RESPONDENT
12) ITA No.998 of 2009
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
MAGIC INTERNATIONAL PVT. LTD., New Delhi
ITA No.462 of 2009 & Ors. Page 3 of 50
. . .RESPONDENT
13) ITA No.1421 of 2009
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
R.C. ENERGY MATERING PVT. LTD. . . .RESPONDENT
14) ITA No.1618 of 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
KAISER EXPORT PVT LTD . . .RESPONDENT
15) ITA No.1758 of 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
PEARL INDIA PUBLISHING HOUSE PVT. LTD.
. . .RESPONDENT
16) ITA No.1978 of 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
STELCO INDIA P. LTD. . . .RESPONDENT
17) ITA No.622 of 2011
ITA No.462 of 2009 & Ors. Page 4 of 50
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
CAPARO INDIA DEVELOPMENT PVT. LTD.
. . .RESPONDENT
18) ITA No.623 of 2011
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
CAPARO INDIA PVT. LTD. . . .RESPONDENT
19) ITA No.270 of 2011
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
SHIVA COMMODITIES AND DERIVATIVES
. . .RESPONDENT
Reserved On: April 29, 2011
Pronounced On: May 11, 2011
20) ITA No.1588 of 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
TIMELESS FASHIONS PVT. LTD. . . .RESPONDENT
21) ITA No.211 of 2010
ITA No.462 of 2009 & Ors. Page 5 of 50
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
NANDLALA SECURITIES PVT. LTD. . . .RESPONDENT
22) ITA No.352 of 2011
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
INDIAN TECHNOCRAFT LTD. . . .RESPONDENT
Reserved On: May 02, 2011
Pronounced On: May 11, 2011
23) ITA No.2014 of 2010
COMMISSIONER OF INCOME TAX . . . APPELLANT
VERSUS
ROXY INVESTMENT . . .RESPONDENT
Counsels for the Revenue: Ms. Prem Lata Bansal, Sr.
Advocate with Mr. Deepak
Anand.
Mr. Sanjeev Sabharwal, Sr.
Standing Counsel.
Mr. N.P. Sahni, Sr. Standing
Counsel.
Mr. Kamal Sawhney, Sr.
Standing Counsel.
Ms. Rashmi Chopra, Sr.
Standing Counsel.
ITA No.462 of 2009 & Ors. Page 6 of 50
Counsels for the Assessee: Mr. Ajay Vohra with Ms.
Kavita Jha, Advocates.
Mr. Salil Kapoor, Advocate.
Dr. Rakesh Kapoor with Ms.
Poonam Ahuja, Advocates.
Mr. Satyen Sethi with Mr. A.T.
Panda, Advocates.
Mr. Rajat Navet, Advocate.
Mr. Sandeep Sapra, Advocate.
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?
A.K. SIKRI, J.
1. In all these appeals, same questions of law touching the
interpretation that is to be accorded to the provisions of
Section 2(22)(e) of the amount received by the Income Tax Act
(hereinafter referred to as ‗the Act'), arise for consideration.
Our purpose would be served by taking note of the questions of
law framed in ITA No.462 of 2009, as concededly answer
thereto shall cover the outcome of all these appeals. The
substantial questions of law on which this appeal was admitted
are as under:
―a) Whether ITAT was correct in law in deleting the
addition of `6,32,72,265/- made by the Assessing
Officer in the hands of assessee company under
Section 2(22)(e) of the Act?
b) Whether ITAT was correct in law in holding that the
addition could not have been made by the Assessing
Officer in the assessee company as it was not the
shareholder of M/s Jackson?
c) Whether ITAT has correctly interpreted the provisions
of Section 2(22)(e) of the Act?
d) Whether order passed by ITAT is perverse in law and
on facts when it deleted the addition holding that
though the amount received by the assessee by way
of book entry falls within the ambit of Section
2(22)(e) of the Act but the same cannot be assessed
in the hands of Assessee?"
2. Though as many as four questions are framed, it is with
singular focus, viz., whether the assessee who was not the
shareholders of M/s. Jackson Generators (P) Ltd. (JGPL) could
be treated as covered by the definition of ‗dividend' as
contained in Section 2(22)(e) of the Income Tax Act
(hereinafter referred to as ‗the Act'). This issue has arisen
under the following circumstances.
3. The assessee filed the return declaring income at ‗Nil' under
normal provisions but at `1.45 Crores under Section 115JB of
the Act. During the assessment proceedings, the Assessing
Officer (AO) noticed that the assessee company had received
advances of `6,32,72,265/- by way of book entry from JGPL
and the shareholders having substantial interest in the
assessee company were also having 10% of the voting power
in JGPL. The AO specifically took note of the share-holding
pattern in the assessee company as well as in JGPL, which was
as following:
―The share holding pattern of the assessee company
(hereinafter referred as APL) as on 31.03.2003 is as
follows:
Percentage holding
1. Mahesh Kumar Gupta 45.1%
2. Rukmani Gupta 45.1%
3. Manmohan Gupta 9.8%
The share holding pattern of a company M/s Jakson Generators
P. Ltd. (hereinafter referred as JGPL) is as under:-
Percentage holding
1. Mahesh Kumar Gupta 43.19%
2. Rukmani Gupta 26.46%
Others 30.35%‖
4. The AO was of the view that as the two Guptas were the
members holding substantial interests in JGPL which had
provided loans and advances to the assessee company and
these very Guptas had substantial interest even in the
assessee company, for the purpose of Section 2(22)(e) of the
Act the amount received by the assessee from JGPL which
constituted ‗advances and loans' would be treated as deemed
dividend within the meaning of Section 2(22)(e) of the Act and
added the aforesaid amount to the income of the assessee.
The assessee had specifically pleaded that the provisions of
Section 2(22)(e) of the Act would not be attracted as the
assessee was not a shareholder in JGPL. According to the
assessee, for the purposes of application of Section 2(22)(e) of
the Act, one of the essential conditions was that the concern
receiving the said money has to be that income is to be
assessed at the hands of shareholder. The AO rejected this
contention.
5. CIT (A) affirmed the aforesaid view taken by the AO.
6. However, in further appeal before the Tribunal, the appeal of
the assessee has been allotted vide impugned order dated
06.06.2008 thereby deleting the addition made by the AO on
account of deemed dividend under Section 2(22)(e) of the Act.
The Income Tax Appellate Tribunal (for brevity ‗the Tribunal')
held that though the amount received by the assessee by way
of book entry is a deemed dividend within the meaning of
Section 2(22)(e) of the Act, the same cannot be assessed in
the hands of assessee company, as it was not the shareholder
in the company JGPL. A dividend cannot be paid to a non-
shareholder. It would have to be taxed, if at all, in the hands
of the shareholders who have a substantial interest in the
assessee concern and also holding not less than 10% of the
voting power in JGPL.
7. We may point out at this stage that the Tribunal has relied
upon the decision of the Special Bench, Mumbai in the case of
ACIT Vs. Bhaumik Colour (P) Ltd. 118 ITD 1 (Mum.)
(SB). The said decision of the Special Bench has been
affirmed by the Bombay High Court in the case of
Commissioner of Income Tax Vs. Universal Medicare (P)
Ltd. 190 Taxman 144 (Bom.)
8. Before we discuss the aforesaid decision, it would be prudent
to take note of the provision of Section 2(22)(e) of the Act. It
reads as under:
―(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, 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;
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).]‖
9. It was not in dispute before us that all other conditions
stipulated in this provision stands satisfied in the present case.
There is a payment by a company (i.e. JGPL) of a sum which is
in the nature of ‗advance or loans' and the payment is within
the limits of accumulated profits possessed by JPGL. The
payment is not made to the Guptas directly, who are the
shareholders, but to the assessee which is admittedly a
concern in which such shareholders, i.e., Guptas are also
members/shareholders and they have substantial interest in
the assessee as is clear from the share pattern disclosed above
as per Section 2(32) of the Act, in order to have substantial
interest in the company such shareholders i.e. (Guptas) in the
present case who carry no less than 20% of the voting power.
In the instant case, the share holding of Guptas is much more
than prescribed 20%. It is for this reason whether all the
conditions stipulated in Clause (e) of Section 2(22) of the Act
stand satisfied. As a fortiori, the payment of ‗advance or loans'
made by JGPL to the concern, i.e., the assessee would be
treated as dividend within the meaning of Section 2(22)(e) of
the Act. The dispute which has arisen, in the scenario is to
whether this is to be treated as dividend income in the form of
dividend advance of the shareholders or advance of the said
concern (i.e. the assessees herein). Whereas the Department
has taken it as income at the hands of the assessee, as per
the assessee it cannot be treated as dividend income to their
account. The Tribunal has accepted this plea of the assessee
holding that such dividend income is to be taxed at the hands
of shareholders.
10. In Bhaumik Colour (P) Ltd. (supra), the Special Bench,
Mumbai took note of the historical background of Section
2(22)(e) of the Act. There cannot be any dispute that the
historical background narrated by the Special Bench is flawless
and therefore, we can reproduce the same:
(a) Section 2(6A)(e) of the IT Act, 1922, as introduced
by the Finance Act, 1955 corresponding to Section
2(22)(e) of the IT 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 company 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 IT Act, 1961, defines
dividend. Section 2(22)(e) of the Act, which is
equivalent to Section 2(6A)(e) of the 1922 Act, as it
existed originally in the IT Act, 1961, read as follows:
Section 2(22) 'Dividend' includes-
(a) to (d) ...
(e) Any payment made 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) by
way of advance or loan to a shareholder, being a
person who has a substantial interest in the company,
of 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.
(c) The aforesaid Clause (e) of the Act has been
amended w.e.f. 1st April, 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 31st 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.
Explanation 3 to Section 2(22)(e) is as follows:
Explanation 3 : For the purpose of this clause--
(a) "concern" means an HUF, or a firm or an AOP or
a BOI 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.
11. It is clear from the above that Under the 1922 Act, two
categories of payments 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 of or for the
individual benefit of a shareholder was considered as dividend.
In the 1961 Act, the very same two categories of payments
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 w.e.f. 1st April, 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.
12. The controversy in the present case relates to this new
category introduced by way of Amendment, viz., payment to
any concern in which such shareholder is a member or a
partner or in which he has a substantial interest. The Special
Bench analyzed the language implied in creating this new
category and spelt out the conditions which are required to be
satisfied for attracting this category in Para 26 of its order,
which reads as under:
―19. The provisions of Section 2(22)(e) create a fiction
bringing in amounts paid otherwise than as dividend into
the net of dividends. Therefore, this clause must be given a
strict interpretation as held by the Hon'ble Supreme Court
in the case of CIT v. C.P. Sarathy Mudaliar. 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 31st 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 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.
20. In the case of CIT v. C.P. Sarathy Mudaliar (supra),
provisions of Section 2(6A)(e) of the Act, 1922, which was
synonymous to Section 2(22)(e) of the IT Act, 1961 came
up for consideration. In the said case, members of HUF
acquired shares in a company with the fund of the family.
Loans were granted to HUF 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 HUF could not be considered to be a 'shareholder'
under Section 2(6A)(e) of the Act and hence, loans given to
the HUF 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.
21. The aforesaid decision of the apex Court in the case of
C.P. Sarathy Mudaliar (supra) has been followed by the
apex Court in the case of Rameshwarlal Sanwarmal v. CIT
(supra). In this case, the company advanced the loans to
the assessee HUF 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 HUF. On the above facts, the question
before the Supreme Court was whether the loans advanced
to the HUF-beneficial owner of the shares-would be taxed
as deemed dividend in the hands of the HUF. The Supreme
Court held that the HUF 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:
...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).
22. 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 percentage of
voting power that such shareholder should hold that has
been prescribed as an additional condition under the 1961
Act. The word "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
subsequent statute, the legislature must be taken to have
used them according to the meaning which a Court of
competent jurisdiction has given them.
23. 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 provisions w.e.f.
1st April, 1988 only qualifies the word "shareholder" 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
described 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, Section
2(22)(e) imposes a further condition that the shareholder
has also to be 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.
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.
25. The new category of payment which was considered as
dividend introduced by the Finance Act, 1987 w.e.f. 1st
April, 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.
26. 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 participate 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 per
cent voting power. The Hon'ble Rajasthan High Court in the
case of Union of India us. Wazir Singh, 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
and Anr. v. Grain Chambers Ltd. AIR 1959 All 279 has held
as follows:
In fact, it appears to us that the word 'such' is used before
a noun in a latter 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 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.‖
13. The Special Bench held that the intention behind this provision
is to tax dividend in the hands of the shareholders.
14. The Bombay High Court while confirming the aforesaid decision
of the Special Bench in the case of Universal Medicare (P.)
Ltd. made the analysis this provision in the following manner:
―8. Clause (e) of section 2(22) is not artistically worded.
For facility of exposition, the contents can be broken down
for analysis: (i) Clause (e) applies to any payment by a
company not being a company in which the public is
substantially interested of any sum, whether as
representing a part of the assets of the company or
otherwise made after the 31 May, 1987; (ii) Clause (e)
covers a payment made by way of a loan or advance to (a)
a shareholder, being a 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 (b) any
concern in which such shareholder is a member or a
partner and in which he has a substantial interest; (iii)
Clause (e) also includes in its purview any payment made
by a company on behalf of or for the individual benefit, of
any such shareholder; (iv) Clause (e) will apply to the
extent to which the company, in either case, possesses
accumulated profits. The remaining part f the provision is
not material for the purposes of this appeal.
9. In order that the first part of Clause (e) of Section 2(22)
is attracted, the payment by a company has to be by way
of an advance or loan. The advance or loan has to be
made, as the case may be, either to a shareholder, being a
beneficial owner holding not less than ten per cent of the
voting power or to any concern to which such a shareholder
is a member or a partner and in which he has a substantial
interest. The Tribunal in the present case has found that as
a matter of fact no loan or advance was granted to the
assessee, since the amount in question had actually been
defalcated and was not reflected in the books of account of
the assessee. The fact that there was a defalcation seems
to have been accepted since this amount was allowed as a
business loss during the course of assessment year 2006-
2007. Consequently, according to the Tribunal the first
requirement of there being an advance or loan was not
fulfilled. In our view, the finding that there was no advance
or loan is a pure finding of fact which does not give rise to
any substantial question of law. However, even on the
second aspect which has weighed with the Tribunal, we are
of the view that the construction which has been placed on
the provisions of Section 2(22)(e) is correct. Section
2(22)(e) defines the ambit of the expression 'dividend'. All
payments by way of dividend have to be taxed in the hands
of the recipient of the dividend namely the shareholder.
The effect of Section 2(22) is to provide an inclusive
definition of the expression dividend. Clause (e) expands
the nature of payments which can be classified as a
dividend. Clause (e) of Section 2(22) includes a payment
made by the company in which the public is not
substantially interested by way of an advance or loan to a
shareholder or to any concern to which such shareholder is
a member or partner, subject to the fulfillment of the
requirements which are spelt out in the provision. Similarly,
a payment made by a company on behalf, of for the
individual benefit, of any such shareholder is treated by
Clause (e) to be included in the expression 'dividend'.
Consequently, the effect of Clause (e) of Section 2(22) is to
broaden the ambit of the expression 'dividend' by including
certain payments which the company has made by way of
a loan or advance or payments made on behalf of or for the
individual benefit of a shareholder. The definition does not
alter the legal position that dividend has to be taxed in the
hands of the shareholder. Consequently in the present case
the payment, even assuming that it was a dividend, would
have to be taxed not in the hands of the assessee but in
the hands of the shareholder. The Tribunal was, in the
circumstances, justified in coming to the conclusion that, in
any event, the payment could not be taxed in the hands of
the assessee. We may in concluding note that the basis on
which the assessee is sought to be taxed in the present
case in respect of the amount of Rs. 32,00,000/- is that
there was a dividend under Section 2(22)(e) and no other
basis has been suggested in the order of the Assessing
Officer.‖
15. At this stage, it will be useful to point out that even the
Rajasthan High Court in the case of Commissioner of
Income Tax Vs. Hotel Hilltop 217 CTR (Raj.) 527 had
interpreted the provision in identical manner. It would be apt
to quote Para 7 of the said judgment which contains the
relevant discussion:
―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 the
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 concern
firm. In which event, it would fall within the expression
"deemed dividend". Obviously, income from dividend, is
taxable as income from 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 share holding, and
are having requisite interest, in the firm, but then, thereby
the deemed dividend would not be deemed dividend in the
hands of the firm, rather it would obviously be deemed
dividend in the hands of the individuals, on whose behalf,
or on whose individual benefit, being such shareholder, the
amount is paid by the company to the concern.‖
16. Notwithstanding the aforesaid judgments of Bombay High
Court and Rajasthan High Courts, learned counsel appearing
for the Revenue made a frantic effort to persuade us to take a
contrary view. Ms. P.L. Bansal, learned Senior Counsel
appearing for the Revenue, leading from the front, made a
fervent plea that some of the significant aspects were not
noticed and discussed by the two High Courts in the aforesaid
judgments which could have altered the course of action. She,
thus, started her comments on first principle and citing various
provisions of the Act as well as the deeming fiction which the
concerned provisions of Section 2(22)(e) of the Act had
created, her endeavour was to demonstrate that by this
deeming provision fictionally the concern which receives such
payment would be treated shareholder for the purposes of this
provision and such a payment in the form of advance or loan
has to be treated as dividend in the hands of a recipient, i.e., a
kind of concern stipulated in the second category and logically,
it is this concern (which is the assessee in the instant case)
who should be taxed for such dividend income. The genesis of
her submission runs as follows:
Normally, a company incorporated under the Indian
Companies Act would distribute the income/profits to its
shareholders by declaring dividend. Therefore, dividends
represent the profits earned by a company which are given to
the shareholders who are treated as owners of the company to
the extent of their shareholding. However, in those companies
where public does not have major stake and are closely held
companies, there can always be an apprehension that the
profits are given away to the shareholders, who have
controlling/substantial interest, in the form of loans and
advances so that those very profits are not transmitted to the
shareholders in the form of dividends resulting into evading of
tax advance of recipients, viz., the shareholders who would
have otherwise received that very amount as dividends. It was
pointed out that under Section 8 of the Act, dividend income of
the interest specified therein is to be included in the total
income of the assessee. Section 14 of the Act stipulates
various heads of income, one of them being ―Income from
Other Sources‖. As per Section 56 of the Act, dividend income
is to be included under this head, viz., ―Income from Other
Sources‖. Thus, the amount of dividend received by the
shareholders is to be treated as income which is to be taxed
under head ―Income from Other Sources‖. She referred to the
Supreme Court judgment in the case of Kantilal Manilal and
Ors. v. The Commissioner of Income-Tax 41 ITR 275
where the nature of this kind of income is explained in the
following manner:
―................Dividend‖ is defined in section 2(6A) as inclusive
of various items and exclusive of certain others which it is
not necessary to set out for the purpose of this appeal.
―Dividend‖ in its ordinary meaning is a distributive share of
the profits or income of a company given to its
shareholders. When the Legislature by section 2(6A)
sought to define the expression ―dividend‖ it added to the
normal meaning of the expression several other categories
of receipts which may not otherwise be included therein.
By the definition in section 2(6A), ―dividend‖ means
dividend as normally understood and includes in its
connotation several other receipts set out in the
definition...............‖
17. She, thus, argued that in order to ensure that the income
which is normally to be distributed as dividend by the company
is not frittered away in the form of advance and loans to the
same very shareholders escaping the clutches of tax,
provisions of Section 2(22)(e) of the Act were enacted. By this
provision, a fiction is created and certain receipts which would
not be dividend in common parlance are qualified and treated
as dividend for the purpose of exigible to taxation under this
Act. Her submission was that when this legal fiction is created
in respect of dividend income, it was to be taken to its logical
conclusion. Thus, any concern which had received the amount
should be taxed, was the submission. Ms. Bansal bolstered her
submission by referring to Section 4 of the Act which is a
charging section and stipulates that the tax is to be paid at the
rates specified in respect of ‗the total income of the previous
year of every person'. From this, she argued that it is the
income in the hands of the person which was liable to be taxed,
which would mean that the recipient of the dividend would be
such a person who has earned this income. She also relied
upon the provisions of Section 5 of the Act, which deals with
‗scope of total income' and puts the income in the hands of
recipient, as the person who is to be taxed in this behalf.
Thus, her submission was that the provisions of 2(22)(e) of the
Act pertaining to the aforesaid category were to be interpreted
having regard to the aforesaid provisions. As per the deemed
provision, income would be of a person who receives ‗loans and
advances'. She also referred to Explanation 3 to Section
2(22)(e) of the Act, which reads as under:
―Explanation 3 - For the purposes of this Clause,-‖
(a) ―concern‖ means a Hindu undivided family, or a firm
or an associate 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;‖
18. She also took umbrage under Circular No.495 dated
22.09.1997 issued by Central Board of Direct Taxes, which
reproduced in 168 ITR (Statues) 91 and reads as under:
―(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.‖
19. Her main thrust was on the words ―further deemed dividend
would be taxable in the hands of the concern, where all the
following conditions are satisfied.........................‖. She, thus,
argued that when the aforesaid category was introduced by
way of Amendment by Finance Act 1987 making the said
category effective from 13.04.1988, this Circular issued by
CBDT would clearly show that what was intented was that the
amount in the form of advance or loans deemed as dividend is
taxable by the concern, viz., the recipient which is the assessee
in the instant case. According to her, such a deemed provision
and a fiction created by the Legislature had to be taken to its
logical conclusion, as highlighted by a Full Bench of this Court
as well in Andaleeb Sehgal vs. Union of India (UOI) and
Anr. 173 (2010) DLT 296 in the following terms:
―21. From the aforesaid pronouncements, the principle
that can be culled out is that it is the bounden duty of the
court to ascertain for what purpose the legal fiction has
been created. It is also the duty of the court to imagine the
fiction with all real consequences and instances unless
prohibited from doing so. That apart, the use of the term
'deemed' has to be read in its context and further the
fullest logical purpose and import are to be understood. It
is because in modern legislation, the term 'deemed' has
been used for manifold purposes. The object of the
legislature has to be kept in mind. On a scanning of the
language employed in Section 11 of the Act, it is clear as
day that once the notification comes into existence in
respect of an Authority, it becomes a Commission under
Section 3 for the purposes of the Act because of the use of
the term 'deemed'. At the same time, the government has
been conferred the power, a significant and a pregnant
one, to form an opinion whether all or any of the provisions
of the Act should be made applicable to that Authority and
direct that only those provisions of the Act shall be applied
to that Authority. To elaborate, the appropriate
government has been bestowed with the power to exclude
the applicability of certain provisions of the Act while
appointing an Authority other than a Commission under
Section 3 of the Act and at that point of time it can exclude
certain provisions not to be made applicable. Thus, though
the authority becomes a deemed Commission appointed
under Section 3 for the purposes of the Act, it has to be
read in the context keeping in view the intendment of the
legislature. It has to be construed that the term 'deemed'
does not clothe the said authority, to be a Commission
under the Act which has all the powers as the competent
government has the power/authority to exercise the
exclusion for certain provisions while issuing a notification.‖
20. She also referred to the judgment of the Supreme Court in the
case of Builders Association of India and Ors. v. Union of
India (UOI) and Ors 73 STC 370: (pg.400)
―36. Even after the decision of this Court in the State of
Madras v. Gannon Dunkerley & Co. (Madras) Ltd.
[1959]1SCR379 (supra) it was quite possible that where a
contract entered into in connection with the construction of
a building consisted of two parts, namley, one part relating
to the sale of materials used in the construction of the
building by the contractor to the person who had assigned
the contract and another part dealing with the supply of
labour and services, sales tax was leviable on the goods
which were agreed to be sold under the first part. But sales
tax could not be levied when the contract in question was a
single and indivisible works contract. After the 46th
Amendment the works contract which was an indivisible
one is by a legal fiction altered into a contract which is
divisible into one for sale of goods and the other for supply
of labour and services. After the 46th Amendment, it has
become possible for the States to levy sales tax on the
value of goods involved in a works contract in the same
way in which the sales tax was leviable on the price of the
goods and materials supplied in a building contract which
had been entered into in two distinct and separate parts as
stated above. It could not have been the contention of the
revenue prior to the 46th Amendment that when the goods
and materials had been supplied under a distinct and
separate contract by the contractor for the purpose of
construction of a building the assessment of sales tax could
be made ignoring the restrictions and conditions
incorporated in Article 286 of the Constitution. If that was
the position can the States contended after the 6th
Amendment under which by a legal [fiction the transfer of
property in goods involved in a works contract was made
liable to payment of sales tax that they are not governed
by Article 286 while levying sales tax in sale of goods
involved in a works contract? they cannot do so. When the
law creates a legal fiction such fiction should be carried to
its logical end. There should not be any hesitation in giving
full effect to it. If the power to lax a sale in an ordinary
sense is subject to certain conditions and restrictions
imposed by the Constitution, the power to tax a transaction
which is deemed to be a sale under Article 366(29A) of the
Constitution should also be subject to the same restrictions
and conditions. Ordinarily unless there is a contract to the
contrary in the case of a works contract the property in the
goods used in the construction of a building passes to the
owner of the land on which the building is constructed,
when the goods or materials used are incorporated in the
building. The contractor becomes liable to pay the sales tax
ordinarily when the goods or materials are so used in the
construction of the building and it is not necessary to wait
till the final bill is prepared for the entire work. In Hudson's
Building Contracts (8th edition) at page 362 it is stated
thus:
―The well-known rule is that the property in all
materials and fittings, once incorporated in or
affixed to a building, will pass to the free holder -
quicquid plantatur solo, solo cedit. The employer
under a building contract may not necessarily be
the free holder, but may be a lessee or licensee,
or even have no interest in the land at all, as in
the case of a subcontract. But once the builder
has affixed materials, the property in them
passes from him, and at least as against him they
become the absolute property of his employer,
whatever the latter's tenure of or title to the land.
The builder has no right to detach them from the
soil or building, even though the building owner
may himself be entitled to sever them as against
some other person - e.g., as tenant's fixtures.
Nor can the builder reclaim (hem if they have
been subsequently severed from the soil by the
building owner or anyone else. The principle was
shortly and clearly stated by Blackburn J. in
Appleby v. Myers (1867) LR 2 CP 651 :'Materials
worked by one into the property of another
become part of that property. This is equally true
whet her it be fixed or movable properly. Bricks
built into a wall become part of the house, thread
stitched into a coat which is under repair, or
planks and nails and pitch worked into a ship
under repair, become part of the coat or the
ship.‖
21. We have seriously deliberated on the aforesaid arguments
advanced by the counsels for the Revenue.
22. Insofar 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
provision applicable. In Commissioner of Income Tax Vs.
C.P. Sarathy Mudaliar [1972] 83 ITR 170, 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 interest, of any sum
(whether as representing a part of the assets 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 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.‖
23. It is rightly pointed out by the Bombay High Court in Universal
Medicare (P) Ltd. (supra) 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.
(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.
24. The intention behind enacting 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.
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.
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.
28. Insofar as reliance upon Circular No. 495 dated 22.09.1997
issued by 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. (supra) 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.
29. No doubt, the legal fiction/deemed provision created by the
Legislature has to be taken to ‗logical conclusion' as held in
Andaleeb Sehgal (supra). The Revenue wants the deeming
provision to be extended which is illogical and 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.
30. Before we part with, some comments are to be necessarily
made by us. As pointed out above, it is not in dispute that the
conditions stipulated in Section 2(22)(e) of the Act treating the
loan and advance as deemed dividend are established in these
cases. Therefore, it would always be open to the Revenue to
take corrective measure by treating this dividend income at the
hands of the shareholders and tax them accordingly. As
otherwise, it would amount to escapement of income at the
hands of those shareholders.
31. We may also point out here that when these appeals along with
other appeals were heard, some appeals were listed and the
tax effect of which was less than `10 lacs and those were
dismissed on that ground. Had those appeals been decided on
merits, still the assessees would have succeeded. At the same
time, in those cases, we would not like the shareholders to go
scot free and therefore, even in those cases, it would be
permissible for the Revenue to take remedial steps by roping in
the shareholder(s) and tax the deemed dividend at their hands.
32. We, thus, answer the questions in favour of the assessee and
against the Revenue, as a result, these appeals are dismissed.
ITA No.1588 of 2011
33. In this appeal, we find that the addition is deleted on two
counts:
(i) The assessee who was recipient of the amount was not
the shareholder in the payer company and therefore,
provisions of Section 2(22)(e) of the Act were not
applicable.
(ii) Even the money which was paid was not in the nature of
loan or advance simplicitor, but the amounts were
advanced for business transaction.
34. Though the appeal of the Revenue is to fail on the first
question, which is answered while deciding this appeal above,
answer to second question is also necessary for the simple
reason that if the assessee succeeds on this issue, then even
the shareholder cannot be fastened with any tax liability as
conditions stipulated under Section 2(22)(e) of the Act would
not be treated as satisfied.
35. From the orders of the Authorities below, we find that an
amount of `4,25,08,497/- was given by M/s. Golden Strands
Private Limited (hereinafter referred to as ‗M/s Golden') to the
assessee company. Two shareholders in M/s Golden, viz. Shri
Ranjeet Bhatia and Smt. Nenu Bhatia, who hold 50% share
each, are also the Directors of the company. These two
shareholders hold 10.67% and 16.66% shares in the assessee
company as well. Thus, other conditions contained in Section
2(22)(e) of the Act are satisfied. However, the CIT (A) as well
as the Tribunal have found that the assessee having a trading
relationship with M/s Golden with whom during the year, job
work of `1,98,66,179/- was done. The audited accounts were
submitted. The submission of the assessee is that the
transactions carried during the year had been carried on the
normal course of business and as such, there was no advance
of money to invoke provisions of deemed dividend. The AO, in
fact, did not even go into this assessee and simply going by the
interest of the two shareholders (two Bhatias) in M/s Golden
and in the assessee, he taxed the assessee. Finding of facts
found by the CIT (A) and the Tribunal are that the transaction
in question was a business transaction which had benefitted
both the assessees and M/s Golden, and that the transaction
did not represent giving any loan or advance simplicitor by M/s
Golden to the assessee.
36. We are of the opinion that under no circumstances, the
provisions of Section 2(22)(e) of the Act could be invoked.
This appeal is accordingly dismissed.
ITA No.211 of 2011
37. In this case also, we find the amount in question given by the
payer to the assessee was not loan or advance and detailed
finding of facts are arrived at by the CIT (A) and the Tribunal
that the money in question was trading receipt and result of
business transactions between the parties. The findings
recorded by the two Authorities below are that the assessee
does buy and sell shares through M/s. O.J. Financial Services
Ltd. and for that, it had given a margin money to the said
broker in the immediate preceding year. It is this amount,
which was treated deemed dividend by the AO, though the
same was refund of margin money by M/s. O.J. Financial
Services Ltd. (payer) to the assessee company and not a loan
or advance as alleged by the AO in the assessment order.
38. The observations/findings of the CIT(A) in this behalf are as
under, which have been confirmed by the Tribunal also:
―In view of the above, it is settled law that for attracting
provision of section 2(22)(e), there must be a loan or
advance and such loan and advance should be for the
benefit of the beneficial shareholder. In the instant case,
there is no loan or advance to the shareholder of the
appellant company and the appellant company is not the
shareholder in M/s O.J. Financial Services Ltd. Therefore,
deemed dividend cannot be taxed in the hands of the
person other than a shareholder in the present case.
Since, appellant company is not a shareholder in M/s O.J.
Financial Services Ltd., the provisions of section 2(22)(e)
do not apply in the hands of the appellant company.‖
39. In fact, even the AO has observed that there was trading
relations between the parties, but formed a wrong opinion that
―the trading liabilities as such are not examined from the scope
of deemed dividend‖. This was rightly repelled by the CIT (A)
in the following manner:
―Without prejudice to this, even the allegation of the AO
that trading transaction like refund of margin money and
buying and selling of shares as in the instant case are
covered in the mischief of section 2(22)(e) of the Act is not
tenable in the eyes of law. First of all, the question
whether trading advance or trading transaction constitute
loan or advance, an essential ingredient to cover a
transaction within section 2(22)(e) of the IT Act, was
considered by the Hon'ble High Court, Delhi in the case of
CIT Vs. Raj Kumar ITA No.1130/2007 judgment delivered
on 14.05.2009 and CIT Vs. Ambassador Travels (P) Ltd.
(ITA No.337/2008) dated 23.04.2008. In both these case
the Court while affirming of the judgment of Hon'ble High
Court of Bombay in the case of Nagindas M. Kapadia has
held that trading advances are not covered within the
mischief of section 2(22)(e) of the IT Act.
In view of the above discussion, it is clear that trading
transaction/or refund of margin money by M/s O.J.
Financial Services Ltd. to the appellant company are not
covered under the mischief of section 2(22)(e) of the IT
Act.‖
40. There is another reason given by the CIT (A) as well as the
Tribunal which touches the extent of share holding. What is
found is that Shri Navin Gupta holds share in M/s. O.J.
Financial Services Ltd. in his individual capacity. On the other
hand, the shareholding in the assessee company is by HUF of
which Shri Navin Gupta is the Karta. On that basis, the CIT (A)
as well as the Tribunal held that there was no common
shareholder in the two companies. Though at the bar, this
approach of the Tribunal is questioned by the learned counsel
for the Revenue on the plea that even in the assessee
company, it is the HUF, which is holding the shares, for the
purposes of Section 2(22)(e) of the Act, it should be treated as
common shareholder inasmuch as Shri Navin Gupta as Karta in
same position influences the decision of the assessee as he
would be in his individual capacity. However, since the
transaction itself is not treated as loan advanced to shareholder
of the company, this aspect need not arise for consideration.
41. This appeal is accordingly dismissed on the aforesaid ground
itself.
ITA No.352 of 2011
42. In this case, the respondent assessee is engaged in the
business of procuring of contract work for various clients from
Government departments. According to the AO, the assessee
had taken loan from M/s Sweta Estate Pvt. Ltd. The share
holding pattern of M/s Sweta Estates Pvt Ltd. for the year
under consideration is as below:
Sl.
Name of the No. of %age of
No. Shareholder Shares Shareholding
1. Sh. Amarjit Singh Bakshi 52237 9.95
2. Smt. Amrita Bakshi 52237 9.95
3. Sh. Kanwaljit Singh 51975 9.90
4. Smt. Minu Bakshi 51975 9.90
5. M/s. Bombay Builders 2310 0.44
Pvt. Ltd.
6. Sh. K.S. Bakshi (HUF) 51975 9.90
7. Sh. Sanjit Bakshi 51975 9.90
8. Sh. S.S. Bakshi 52290 9.96
9. Sh. A.S. Bakshi (HUF) 52238 9.95
10. Smt. H.K. Bakshi 52290 9.96
11. Skyrock Engineers Pvt. 48248 9.19
Ltd.
12. Safdarjung Estates Pvt. 5250 1.00
Ltd.
525000 100.00
43. According to the AO, the shareholding of Kanwaljit Singh
(9.9%) and Sh. Kanwaljit Singh, Karta of Sh. K.S. Bakshi
(HUF), whose shareholding in M/s. Sweta Estates Pvt. Ltd., is
9.9%, together exceeds required 10%. On the above
reasoning, it was concluded that the assessee was beneficial
owner of shares holding not less than ten per cent of the voting
power.
44. CIT (A), however, did not agree with the aforesaid opinion of
the AO. He was of the view that shareholding of K.S. Bakshi
(HUF) could not be clubbed with the shareholding of Kanwaljit
Singh for the purposes of bringing the assessee within the tax
net of Section 2(22)(e) of the Act. He was of the view that
HUF of K.S. Bakshi is a separately recognized entity and
separate from individual. Relying upon the judgment of the
Mumbai Bench Tribunal in Bhaumik Colour (P) Ltd. (supra),
the CIT held that Since Section 2(22)(e) refers to both the
registered shareholder and beneficial shareholder, beneficial
owner of the share in this case was HUF and not the Karta of
HUF in his individual capacity. It cannot be disputed that
Bhaumik Colour (P) Ltd. (supra) holds so. The said
judgment is interpreted by the Tribunal in the impugned order
in the following manner:
―6. We have heard both sides. We find ourselves in
complete agreement with the ratio laid down by the Special
Bench of the ITAT in the case of Bhaumik Colour Lab Pvt.
Ltd. (supra). The Special Bench in the aforesaid case has
opined that the provisions of Section 2(22)(e) of the I.T.
Act create a fiction bringing in amounts paid as loans and
advances otherwise than as divided into the net of
dividends and such a provision must received strict
interpretation. By applying the principle of strict
interpretation the Special Bench observed that no (sic.)
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. The word ―shareholder‖ alone existed in
the definition of dividend in the 1922 Act and 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 shareholders. It is a principle of interpretation
of statures that 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 subsequent statute, the
legislature must be taken to have used them according to
the meaning which a court of competent jurisdiction has
given them.
6.1 In the 1961 Act, the word ―shareholder‖ in section
2(22)(e) is followed by the following words ―being a peson
who is beneficial owner of shares‖. This expression only
qualifies the word ―shareholder‖ and does not in any way
alter the position that the shareholder has to be a
registered shareholder nor substitute the requirement to a
requirement of merely holding a beneficial interest in the
shares without being a registered holder of shares. 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 also the first limb of the
provisions of section 2(22)(e) will not apply.‖
45. The Tribunal while forming this opinion was guided by the
judgment of the Supreme Court in C.P. Sarathy Mudaliar
(supra). The said judgment is analyzed and made use of
while interpreting the provisions of Section 2(22)(e) of the Act
holding HUF and Karta thereof on individual capacity for the
application of Section 2(22)(e) of the Act in the following
terms:
―20. In the case of CIT v. C.P. Sarathy Mudaliar (supra),
provisions of Section 2(6A)(e) of the Act, 1922, which was
synonymous to Section 2(22)(e) of the IT Act, 1961 came
up for consideration. In the said case, members of HUF
acquired shares in a company with the fund of the family.
Loans were granted to HUF 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 HUF could not be considered to be a 'shareholder'
under Section 2(6A)(e) of the Act and hence, loans given to
the HUF 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.
21. The aforesaid decision of the apex Court in the case of
C.P. Sarathy Mudaliar (supra) has been followed by the
apex Court in the case of Rameshwarlal Sanwarmal v. CIT
(supra). In this case, the company advanced the loans to
the assessee HUF 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 HUF. On the above facts, the question
before the Supreme Court was whether the loans advanced
to the HUF-beneficial owner of the shares-would be taxed
as deemed dividend in the hands of the HUF. The Supreme
Court held that the HUF 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:
...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).
22. 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 percentage of
voting power that such shareholder should hold that has
been prescribed as an additional condition under the 1961
Act. The word "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
subsequent statute, the legislature must be taken to have
used them according to the meaning which a Court of
competent jurisdiction has given them.
23. 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 provisions w.e.f.
1st April, 1988 only qualifies the word "shareholder" 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
described 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, Section
2(22)(e) imposes a further condition that the shareholder
has also to be 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.
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.‖
46. In view of the above, this appeal is also dismissed.
ITA No.2014 of 2010
47. In this case, apart from the fact that the assessee is not
shareholder and therefore, the loan and advance given to the
assessee is not treated as deemed dividend under Section
2(22)(e) of the Act, we find that the CIT (A) had given
additional ground for non-applicability of the said provision. In
this case, the assessee had taken a loan of `1.40 Crore from
M/s. Teletube Electronics Ltd., which was treated as deemed
dividend by the AO on the ground that the shareholders of M/s.
Teletube Electronics Ltd. had a substantial interest in the
assessee. Admittedly, the assessee is not a shareholder of M/s.
Teletube Electronics Ltd. The shareholding pattern of the two
companies as on 31.03.2002, which is concerned financial year,
was as under:
Roxy
TEL (Lender (Borrower
Shareholders
Company) Company/
Appellant)
Roxy Investment Pvt. Ltd. 1.8% NIL
CEA Consultant Pvt. Ltd. (CEA) 22.08% 17.06%
SW Consultant Pvt. Ltd. (SW) NIL 24.58%
(100% subsidiary of CEA)
Kaura Properties Pvt. Ltd. 36.59% 11.28%
Others 39.53% 47.08%
Total 100% 100%
48. It is clear from the above that no shareholder individually holds
more than 10% shares. The following observations of the CIT
(A) are to be taken note of:
―It is not disputed that Appellant holds only 1.8% shares in
M/s. Teletube Electronics Ltd., the question is whether
Appellant on the strength of shares of M/s. Teletube
Electronics Ltd. held by M/s CEA Consultants P Ltd. can be
said to be beneficial owner of 10% of the voting power. It is
not in dispute those shares of Teletube Electronics Ltd. held
by the Appellant and M/s. CEA Consultants P. Ltd. are
registered in their respective names. It in turn implies that
both the Appellant and M/s. CEA Consultants P. Ltd. are
independently exercising their voting rights.
13. Under the existing provisions of sec. 2(22)(e),
payment made by way of advance or loan to a
shareholder having "substantial interest" in the
company was treated as deemed dividend. The
shareholder having substantial interest as per
provision of clause (32) of sec. 2 of the Act, was the
one carrying not less than 20% voting power. In
other words, earlier sec.2(22)(e) was applicable to
shareholders having substantial interest in the
company and the benchmark of the substantial
interest was 20% of the voting power. By Finance
Act, 1987, this benchmark of substantial interest was
done away with. It is important to note here that
section 2(32) defining the expression "person who
has substantial interest in the company" was not
amended. Therefore, to widen the scope of
sec.2(22)(e), it was necessary to provide for the
category of shareholders to whom the section would
apply and it was provided by inserting the words "a
shareholder, being a person who is beneficial owner
of shares holding not less than 10% f the voting
power". The concept of "voting power" was in built
on the provisions of sec.2(22)(e) as it existed prior to
1987 amendment. The insertion of the words
"beneficial owner of shares holding not less than
10% of the voting power" to "10% of voting power.
A beneficial owner of shares cannot exercise voting power
because to exercise the right to vote his/her name must
appear in the register of members. In this view of the
matter, it will not be correct to say that the ratio laid down
by Hon'ble Supreme Court in Rameshwarlal Sanwarmal Vs.
CIT 122 ITR 1 that word ―shareholder‖ in section 2(22)(e)
is no more applicable.
Moreover, since the purpose of sec. 2(22)(e), as stated in
Circular No.495 dated 22.09.1987, is to tax the distribution
of profits to shareholders, where the same is distributed
not by way of dividend but by way of loan or advances,
therefore, the view that word ―shareholder‖ has been used
as ―registered shareholder‖ cannot be found fault with.
Any other view would be against the very spirit of sec.
2(22)(e) of IT Act. The condition of 10% of the voting
power is to be seen qua the shareholder; otherwise, the
condition would be of no relevance.‖
49. Though the appeal has to fail on the ground that the assessee
cannot be taxed as it is not a shareholder in M/s. Teletube
Electronics Ltd., even on the aforesaid ground, i.e., it was not
having 10/20% shareholding in M/s. Teletube Electronics Ltd.,
non-applicability of Section 2(22)(e) of the Act is apparent.
50. This appeal, therefore, stands dismissed on this ground.
(A.K. SIKRI)
JUDGE
(M.L. MEHTA)
JUDGE
MAY 11, 2011
pmc
