TMI Blog2013 (11) TMI 228X X X X Extracts X X X X X X X X Extracts X X X X ..... or advance by a company cannot be treated as shareholder/member of the latter simply because a shareholder of the lender company holding voting power of 10 per cent or more therein has substantial interest in such concern. If the intention of the legislature was to tax such loan or advance as deemed dividend at the hands of "deeming shareholder", it would have inserted deeming provision in respect of shareholder as well - None of the conditions for invoking the provisions of section 2(22)(e) of the Act were present in the instant case – Deleted the addition – Decided against the Revenue. - ITA No.642/Bang/2012, CO No.96/Bang/2012 - - - Dated:- 6-9-2013 - Shri N. V. Vasudevan And Shri Jason P. Boaz,JJ. For the Petitioner : Shri Praveen Karanth, Jt. CIT (DR) For the Respondent : Shri B. S. Balachandran S.K. Babuprasad, Advocates. ORDER Per Bench ITA No.642/Bang/2012 is an appeal by the revenue against the order dated 28.02.2012 of the CIT(Appeals)-II, Bangalore relating to assessment year 2006-07. The assessee has filed a cross-objection viz., CO No.96/Bang/2012 which is purely supportive of the order of the CIT(Appeals). 2. The only issue that arises for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout a right to participate in profits, carrying not less than twenty per cent of the voting power." 5. The three limbs of s. 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." 6. In the present case admittedly the Assessee does not own any shares in VPSPL and therefore the 1st limb will not be attracted. It is not the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s year. Accordingly, the loan received by the assessee during the previous year amounting to a sum of Rs.44,03,789 was treated as deemed dividend u/s. 2(22)(e) of the Act and brought to tax by the AO. 10. The CIT(Appeals), however, was of the view that to invoke provisions of section 2(22)(e) of the Act, the assessee must be a shareholder in the company which gives loan and since the assessee was not such a shareholder, the CIT(A) held that the loan in question cannot be treated as deemed dividend in the hands of the assessee u/s. 2(22)(e) of the Act. In coming to the aforesaid conclusion, the CIT(A) relied on the decision of the Hon'ble Delhi High Court in the case of CIT v. Ankitech Pvt. Ltd., (2011) Taxpub(DT) 1008 (Del-HC). The CIT(A) also held as follows:- "In the appeal before us, it is an undisputed fact that the recipient concern is not a shareholder in the payer concern. As such, by a plain reading of the law, the deemed dividend cannot be assessed in the hands of the recipient concern. I am inclined to the view that the AO adopted the concept of a deemed shareholding with reference to Sec 2(22)(e) which appears to travel beyond the scope of the section. The Ld. Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 s. 2(22)(e) of the Act is to tax dividend in the hands of shareholder. The deeming provision 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 loan or advances would ultimately be made available to the shareholders of the company by giving the loan or advance. The intention of the legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the Assessee which is not shareholder in the company that has given loan or advance. Since the Assessee in the present case was not a shareholder in VPSPL, the deeming provisions of Sec.2(22)(e) of the Act were not applicable. The CIT(A) has rightly relied on the decision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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