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TMI Blog2013 (11) TMI 228X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(Appeals). 2. The only issue that arises for consideration in the revenue's appeal is as to whether the CIT(Appeals) was justified in deleting the addition of Rs.44,03,789 made by the AO by invoking the provisions of section 2(22)(e) of the Act. 3. The factual background of the case is as follows. The assessee is a company. It is engaged in the business of providing computer services. In the course of assessment proceedings, the AO noticed that a company by name M/s. Value Point Systems Pvt. Ltd. ["VPSPL" for short] had given a loan of Rs.81,90,247 to the assessee. The shareholding pattern of VPSPL is as follows: Mr. R.S. Shanbhag - 50% Mr. Sampath Kumar - 50% As far as the assessee company is concerned, its shares were held in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stantial interest in the company", in relation to a company, means 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nevertheless, the AO invoked the provisions of Sec.2(22) (e) by observing that the conditions laid down in the Second limb were indirectly satisfied for the reasons that Sri Shanbhag and Sri Sampathkumar hold more than 20% share holding in VPSPL and by virtue of the holding of 66% of the shares of the Assessee by VPSPL are deemed to hold more than 20% shares of the Assessee as well. He was also of the view that the entire payment is a made up affair as M/s. Value Point Systems (Pvt.) Ltd. could have distributed dividends out of accumulated profits to share holders after payment of dividend distribution tax and in turn these share holders could have given the loans to M/s.Sourcehub India Pvt. Ltd., if needed. However, the transaction of loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08 (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 High Court has opined that if the Legislature had this intention, it would have inserted the same by way of a deeming provision. Respectfully considering the decision of the Delhi High Court which is squarely on this issue, I am of the view that the addition made by the AO, tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions do not contemplate looking behind the corporate veil. If the argument of the AO is accepted, then that would be ignoring the corporate personality of the Assessee and treating it as two individuals viz., Mr.Shanbhag and Mr.Sampathkumar. The intention behind enacting provisions of s. 2(22)(e) are that closely held companies (i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng provision. Definition of shareholder is not enlarged by any fiction. The conclusion is that the loan or advance given under the conditions specified under s. 2(22)(e) has to be treated as dividend. Fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. Intention behind the provisions of s. 2(22)(e) is to tax dividend in the hands of shareholders. A concern which is given loan 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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