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TMI Blog2011 (5) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; 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 distributi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant 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 go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 conditio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e heard, some appeals were listed and the tax effect of which was less than Rs. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eemed 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 suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 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. Ltd. 48248 9.19 12. Safdarjung Estates Pvt. Ltd. 5250 1.00 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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: Shareholders TEL (Lender Company) Roxy (Borrower Company / Appellant) Roxy Investment Pvt. Ltd. 1.8% NIL CEA Consultant Pvt. Ltd. (CEA) 22.08% 17.06% SW Consultant Pvt. Ltd. (SW) (100% subsidiary of CEA) NIL 24.58% 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 individu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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