TMI Blog2011 (7) TMI 288X X X X Extracts X X X X X X X X Extracts X X X X ..... on 11th May, 2011 in a batch of appeals with lead case entitled Commissioner of Income Tax v. Ankitech Pvt. Ltd. (ITA 462/2009), this very Bench has discussed in detail the extent and scope of the provisions of Section 2(22)(e) of the Income-Tax Act (hereinafter referred to as 'the Act'). This provision reads as under:- "dividend includes ( a ) ** ** ** ( b ) ** ** ** ( c ) ** ** ** ( d ) ** ** ** (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4) The payment of loan or advance is not in course of ordinary business activities. 3. In Commissioner of Income Tax v. C.P. Sarathy Mudaliar [1972] 83 ITR 170, the Supreme Court analysed the provision and pointed out that in so far as payment by a company by way of advance or loan is concerned, it can be made to any of the three persons mentioned therein i.e. it had three limbs and explained the same as under:- "Any payment by a company, not being a company in which the public are substantially interest, of any sum (whether as representing a part of the assets of the company or otherwise) made after 31.05.19987 by way of advance or loan. First limb (a) to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power, Second limb (b) or to my concern in which, such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) Third limb (c) or any payment by any such company on behalf, or for the individual benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 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." 5. We may also point out that while coming to this conclusion, this Court concurred with the same view expressed by the Bombay High Court in Commissioner of Income Tax v. Universal Medicate (P) Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld like to repel the preliminary submission advanced by Mr. Syali, learned Senior Counsel for the assessee, that this aspect is also covered by the judgment in Ankitech (supra). Mr. Syali ventured to make this submission emboldened by the fact that the decision of special Bench Bombay in Bhaumik Colour (supra) has been upheld by the Bombay High Court in Universal Medicare (supra) and in Ankitech (supra) this Court has concurred with the said opinions. On this basis, it was pointed out that following observations of the Special Bench Mumbai in para 24 squarely answered the question posed in these appeals which is reproduced in Ankitech (supra) also. This para reads as under:- "24. The expression "shareholder being a person who is the beneficial owner of shares" referred to in the first limb of Section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial then the provision of Section 2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the first limb of provisions of Section 2(22)(e) will not apply." 10. No doubt, Ankitech (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neficial interest in the shares held by them on behalf of all the partners. Department's view.- A partnership firm is not a person capable of being a member within the meaning of Section 41 of the Companies Act, 1956 and since a partnership is not a legal entity by itself but only a compendious way of describing the partners constituting the firm, it is necessary that the names of all the members of the partnership firm should be entered in the Register of Members in order that the right of the partnership as a whole to the shares in question may prevail. The holding of shares by only one or more partners on behalf of other partners of a firm should not, therefore, ordinarily arise. However, where in a given case, the name or names, of only one or some of the partners is entered in the Register of Members while the intention is that the partnership as a whole should have the right of membership in respect of the shares in question, it is obviously necessary for such partners who hold shares not only for respect of the shares in question, it is obviously necessary for such partners who hold shares not only for themselves but for the benefit of all partners constituting the firm wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sitory, would be deemed to be a member of the concerned company. Unless this condition is satisfied, a beneficial owner cannot be treated as "member" or "shareholder" of a company. 15. Mr. Syali also relied upon the judgment of Allahabad High Court in the case of Commissioner of Income-Tax v. Raj Kumar Singh Co. 295 ITR 9 (All) wherein the Court held that the conditions stipulated in Clause (e) of Section 2(22) of the Act were not satisfied where the assessee firm was not the shareholder of a company which gave the loan and the partners of the firm were shareholders in the books company. This judgment was rendered following Supreme Court judgment in the case of Commissioner of Income Tax v. C.P. Sarathy Mudaliar, 83 ITR 170 (SC). Following observation from the said judgment was quoted by the Allahabad High Court wherein the Supreme Court has held that only loan advanced to shareholder could be deemed to be dividends under Section 2(6A)(e) of the Old Act (corresponding to section 2(22)(e) of the present Act):- "What Section 2(6A)(e) is designed to strike at is advance or loan to a "shareholder" and the word "shareholder" can mean only a registered shareholder. It is difficult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holder" in respect of such shares within the meaning of Section 18(5) of the Income Tax Act, notwithstanding his equitable right to the dividend on such shares, and is not, therefore, entitled to have this dividend income grossed up under Section 16(2) of the Act by the addition of the Income Tax paid by the company in respect of those shares, and claim credit for the tax deducted at source, under Section 18(5) of the Act. The Apex Court held as follows: "The word "holder of a share" are really equal to the word "shareholder", and the expression " holder of a share" denotes, in so far as the company is concerned, only a person who, as a shareholder, has his name entered on the register of members. The position, therefore, under the Indian Companies Act, 1913, is quite clear that the expression "shareholder" or "holder of a share" in so far as that Act is concerned, denotes no other person except a "member".... The question that falls for consideration is whether the meaning given to the expression "shareholder" used in Section 18(5) of the Act by these cases is correct. No valid reason exists why "shareholder" as used in Section 18(5) should mean a person other than the one d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edly a beneficial owner), for want of its own legal entity, per force these share are to be bought in the name of partners. However, for all intent and purposes it is a partnership firm which would be the shareholder as well for the purposes of Section 2(22)(e) of the Act. Otherwise, argued the learned senior Counsel, the very purpose of this provision would be defeated in the case of a partnership firm, as in no case shares would be bought in the name of partnership firm since it is not permissible in law. She further submitted that one does not have to resort to the provision of the Companies Act to find out who is the shareholder. She also submitted that the Supreme Court judgment in Mudaliar (supra) was rendered before the amendment to Section 2(22)(e) of the Act. She also argued that there is a difference between the HUF and the partnership firm which is eloquently brought out by the CIT(A) in his order passed in ITA 1204/2010. 17. We have given our thoughtful consideration to the submission of the counsel for both the parties. According to us the outcome of this appeal depends on the following two questions:- (1) To attract the first limb of Section 2 (22)(e) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m can come within the mischief of Section 2(22)(e) of the Act because of the reason that shares would be purchased by the firm in the name of its partners as the firm is not having any separate entity of its own. With the name of the partner entering into the register of members of the company as shareholder, the said partner shall be the 'shareholder' in the records of the company but not the beneficial owner as 'beneficial owner' is the partnership firm. This would mean that the loan or advance given by the company would never be treated as deemed dividend either in the hands of the partners or in the hands of partnership firm. In this way the very purpose for which this provision was enacted would get defeated. The object behind this provision is succinctly stated in the Circular No. 495 of 22nd September, 1987 particularly in the Explanatory Notes to Finance Act, 1987 when this provision was amended. It reads as under:- "With the deletion of Section 104 to 109 there was a likelihood of closely held companies not distributing their profits to shareholders by way of dividends but by way of loans or advances to that these are not taxed in the hands of the shareholders. The fores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age used by the Legislature or even "do some violence" to it, so as to achieve obvious intention of the Legislature. Reference is made to the decision of the Supreme Court in the Case of K.P. Varghese v. ITO 131 ITR 597 (SC). 21. No doubt, when Section 2 (22) (e) of the Act enacts a deeming provision, it has to be strictly construed. At the same time, it is also trite that such a deeming provision has to be taken to its logical conclusion. If the partnership firm which has purchased the shares is not treated as shareholder merely because the shares were purchased in the name of the partners, that too because of the legal compulsion that shares could not be allotted to the said partnership firm which is a non legal entity, it would be impossible for such a condition to be fulfilled. That is not the purpose of law. The partnership firm is synonym of the partners. As per the Circular issued by the SEBI dated 13th March, 1975 interpreting Section 187(c) of the Companies Act, relied by the learned counsel for the assessee himself, a partnership firm is not a person capable of being a 'member' within the meaning of Section 47 of the Companies Act. It is further explained that since a p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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