TMI Blog2011 (5) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 2(22)(e) of the Act were not applicable. - Even the money which was paid was not in the nature of loan or advance simplicitor, but the amounts were advanced for business transaction. Deemed dividend - liability of the shareholder - scope of the term shareholder for the purpose of section 2(22)(e) - beneficial share holder versus registered shareholder - 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closed 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 Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtent 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting 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) abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;. 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 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. 33. In this appeal, we find that the addition is deleted on two counts: (i) The assessee who was recipient of the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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.No. Name of the Shareholder No. of Shares %age of 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 Pvt. Ltd. 2310 0.44 6. Sh. K.S. Bakshi (HUF) 51975 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r‖ 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trike 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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