2008 (11) TMI 273 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - payment by the company to the concern - Whether deemed dividend u/s. 2(22)(e) can be assessed in the hands of a person other than a shareholder of the lender? - words "such shareholder" includes both the 'registered' shareholder and the beneficial shareholder? - CIT(A) deleted the addition made by the AO for the reason that NNT was not beneficial shareholder of shares in BCPL or UPPL and therefore the second limb of the provisions of s. 2(22)(e) could not be applied vis-a-vis the assessee.

HELD THAT:- In the case of the assessee it is seen that the three trustees of NNT held shares in UPPL and BCPL only as a legal and registered owner. They held shares for and on behalf of 5 beneficiaries of the trust who are different individuals. They were therefore not beneficial owners of the shares. Trust ownership is a peculiar instance of duplicate ownership. Trust property is, in fact, owned by two persons simultaneously in the sense that one is under an obligation to use the property for the benefit of the other. As between trustee and third party ownership conferred on the trustee fictitiously by law prevails, i.e., the trustee is clothed with the rights of the beneficiary and is so enabled to personate or represent him in dealings with the world at large.

The main purpose of trusteeship is to protect the rights and interest of person who for any reason are unable effectively to protect them for themselves. Such protection is required for four classes of people, (a) unborn persons; (b) infants, lunatics, or other disqualified persons; (c) a large number of persons who are interested in common; and (d) persons having conflicting interest in the same property, Le., an owner and an encumbrancer or different kinds of encumbrances. Therefore, the first requirement of holding of shares both as a legal registered owner and beneficial owner of such shares is not satisfied in the case of the assessee. Therefore, provisions of s. 2(22)(e) would not be applicable at all to the case of the assessee.

We therefore hold that deemed dividend u/s. 2(22)(e) can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other person.

The expression 'shareholder' referred to in s. 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of s. 2(22)(e) will not apply. Similarly, if a person is a beneficial shareholder but not a registered shareholder then also the provisions of s. 2(22)(e) will not apply.

There is no merit in this appeal by the Revenue and the same is therefore dismissed.