TMI Blog2014 (9) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... ny and which is not strictly falling within the concept of dividend . Any reference to Explanation 3 and particularly the definition of term concern will not advance or carry the Revenue's case any further - it is the shareholder who is registered as such who is entitled to receive the dividend - Merely because the payment is made to him by way of advance or loan was not termed as such earlier that the legislature has inserted such a payment in the definition of the term dividend and made the definition wide and broad so also inclusive - The view taken in the present case that the recipient/assessee was not a shareholder, thus is in consonance with the legal position. Relying upon Commissioner of Income Tax v/s C. P. Sarathy [1971 (10) TMI 8 - SUPREME Court] - the beneficial owner of shares whose name does not appear in the register of the shareholders of the company cannot be said to be a shareholder though he may be beneficially entitled to the shares but he is not a shareholder - by the deeming provision, such payment by the company is treated as dividend - The purpose is to tax dividend in the hands of the shareholder - so long as the Tribunal in the matters and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7/MUM/2011 WITH INCOME TAX APPEAL NO. 1499 OF 2013 AND ITA 7554/MUM/2011 WITH INCOME TAX APPEAL NO. 1666 OF 2013 AND ITA/7232/M/2010 WITH INCOME TAX APPEAL NO. 1870 OF 2013 AND ITA/8750/2010 JUDGMENT In these Appeals which have been filed by the Revenue, the challenge is to the order of the Income Tax Appellate Tribunal holding that the provisions of Section 2(22)(e) of the Income Tax Act,1961(for short I. T. Act) cannot be invoked as the assessee company was not a shareholder in the lending company. The argument in all these Appeals on behalf of the Revenue is that, though the assessee is a common shareholder with controlling stake in the lending company, the Tribunal found that Section 2(22)(e) of the I. T. Act, is not attracted and this finding raises a substantial question of law. 2 It was then contended that the Income Tax Appellate Tribunal has applied the ratio of its own special bench decision in the case of Assistant Commissioner of Income Tax v/s Bhaumik Colour Pvt Ltd reported in 2009 (313) ITR (AT)146(Mumbai)(SB), equally the Income Tax Appellate Tribunal has proceeded on the footing that the view taken in the case of Bhaumik Colour Pvt Ltd(supra) has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial question of law. Though that is based on the findings of the Tribunal, particularly, as to whether the recipient was required to be a shareholder of the recipient, all such findings and observations are in the nature of obiter dictum. They are not binding on this Court. Therefore, this Court is free to take an independent view. In any event, if this Court is not inclined to agree with the Division Bench in the case of Universal Medicare, then, the matter can be referred to a larger bench. 7 In supporting the above arguments, Mr. Gupta places heavy reliance upon a circular which has been issued and which according to him, fully sets out the intent of the legislature. Mr. Gupta submits that the Finance Act, 1987 was amended with effect from 1st April 1988. Inviting our attention to subclause( e), as it stood before the amendment, and thereafter, Mr. Gupta would submit that the judgments rendered including by the Division Bench of this court and the Special Bench of the Tribunal ignore completely the fact that with deletion of Sections 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 lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's counsel. 12 With the assistance of the learned Senior Counsel appearing for the Revenue and the assessees, we have perused Section 2 (22) (e) of the I. T. Act. The same reads thus: 2 (22) 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany of accumulated profits, any distribution to its shareholders by a company of debentures, debenturestock, or deposit certificates in any form, whether with or without interest, any distribution made to the shareholders by the company on its liquidation, any distribution made to the shareholder by a company on the reduction of its capital and all this is dealt with by clauses (a) to (d) of Section 2(22) of the I. T. Act. 14 Then comes clause (e) which says that any payment by a company and 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 31st May 1987, but by way of advance or loan to a shareholder being a person who is the beneficial owner of the 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 10% of the voting power. This is one category and second one is a payment by way of advance or loan to any concern in which such shareholder is a member or partner and in which he has substantial interest. The third category is any payment by any such company for individual bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atel, Director of the Assessee company holds more than 10% of equity shares in all the companies noted above. He also holds more than 20% of the shares of the assessee company. The Assessing Officer perused the balance sheet of the respective companies and it revealed that the reserves and surpluses in all these companies are more than the amount standing to the credit of these companies. This is the position in the case of all companies except M/s. Patcart Packaging Pvt Ltd and that is how he arrived at the conclusion that the requirement of Section 2(22) (e) of the I. T. Act is satisfied and the balance namely credit entries found in the books of the assessee company were considered for disallowance under Section 2(22)(e) of the Act. 18 Aggrieved and dissatisfied with the adverse order passed by the Assessing Officer also to the above effect so also initiation of proceedings for imposition of penalty that the matter was carried in Appeal interalia on this ground. We are not concerned with the other disallowances made by the Assessing Officer and which were also subject matter of the Appeal before the Commissioner of Income Tax, Mumbai. In the appellate order, the Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gistered shareholder of the company. In the present case the following credit balances were shown in the assessee's account in the following companies: (i)M/s. Bhavin Containers P.Ltd ₹ 38,75,412/ ( ii)M/s.Patel Aluminium Pvt Ltd ₹ 93,978/ ( iii)M/s Lans Metal Pvt Ltd ₹ 28,94,357/ ( iv)M/s.Patcart Packaging Pvt Ltd ₹ 44,31,466/ The finding of the CIT(A) is that the assessee is not a shareholder in any of the aforesaid companies. According to the Assessing Officer, one M. I. Patel who was a director of the assessee company held more than 10% of the equity shares of the above four companies and he also held more than 20% of the shares of the assessee company. But even the Assessing Officer has not found that the assessee company was a shareholder of any of the four companies. In such circumstances the CIT(A) was right in deleting the addition made under section 2(22)(e) following the order of the Special Bench cited above. It is also to be noted that the reasoning of the Special Bench has been upheld by the Hon'ble Bombay High Court in the case of CIT vs. Universal Medicare Private Limited (2010) 324 ITR 263(BOM). Both the order of the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inclusive definition of the expression 'dividend' for the purposes of the Act. Section 2(22)(e) is as follows: (22) dividend includes ( a) to (d).... (e) any payment by a company, not being a company in which the public are substantially interested, or 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 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; 8. Clause (e) of Section 2(22) is not artistically worded. For facility of exposition, the contents can be broken down for analysis: (i) Clause (e) applies to any payment by a company not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstruction 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) is to broaden the ambit of the expression 'dividend' by including certain payments which the company has made by way of a loan or advance or payments made on behalf of or for the indiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in that regard that the above reproduced observations of the Hon'ble Division Bench have been made. The Division Bench held that even on the second aspect, the construction which has been placed on the provision (Section 2(22)(e)) by the Tribunal is correct. All payments by way of dividend have to be taxed in the hands of the recipient of the dividend namely the shareholder. The section provides inclusive definition of term dividend and rather explaining the nature of payment which can be classified as such, therefore, the Division Bench concluded that this definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. In the facts of the case noted by the Division Bench assuming the payment was dividend, it would have to be taxed not in the hands of the asseessee namely Universal but in the hands of the shareholder. 25 Once the correctness of this conclusion is put in issue before us and it is strenuously urged that it requires reconsideration, then, we cannot accept the first contention of the Revenue that the observations in the Division Bench judgment on the second aspect are mere obiter dictum and not a ratio and thus bind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cided or that the view taken in Universal Medicare requires reconsideration. In that regard, we must not brush aside the binding precedent or the judgment of a coordinate bench simply because some of the arguments canvassed before us were either not canvassed or if canvassed were not considered. The binding precedent can be ignored only if it is perincuriam. Such is not the stand before us. All that is urged is several facets and which emerge from a reading of section namely Section 2(22) together with its subclauses have not been noticed by the Division Bench while deciding Universal's case. 28 We are unable to agree with the Revenue in this behalf. What we have noted is that the legislature has incorporated and inserted the definition of the term dividend . It is made inclusive of distribution of profits, any distribution to the shareholders by a company of debentures, debenturestock, or deposit certificate in any form, or distribution made to the shareholders upon liquidation of a company. Equally, amount distributed on reduction of capital is termed as dividend. What is also then included is a payment made by a company to its shareholder. That is by way of advance or lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the payment is made to him by way of advance or loan was not termed as such earlier that the legislature has inserted such a payment in the definition of the term dividend and made the definition wide and broad so also inclusive. 30 We do not see how with this legal position and the status of the shareholder recognized in law can be ignored while interpreting Section 2 (22) (e) of the I. T. Act. Precisely, this is what has been done by this Court in the judgment rendered in the case of Universal Medicare. It is not necessary for us to make a detailed reference to the order of the Special Bench of the Tribunal in the case of Bhaumik Colour Pvt Ltd. Suffice it to hold that the view taken by this Court in the case of M/s. Universal Medicare does not require any reconsideration. We are not in agreement with Shri Gupta that the definition does not contemplate or does not stipulate any requirement of assessee being a shareholder of the assessee like the one in the present case. The view taken in the present case that the recipient/assessee was not a shareholder, thus is in consonance with the legal position noted by us hereinabove. 31 We are of the further view that this Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Ms. Vissanjee on the judgment of the Division Bench of this Court in the case of Commissioner of Income Tax, Patiala v/s Shahzada Nand and Sons and Ors, reported in (1966) 177 ITR 393, is therefore, apposite. Equally, her reliance on the judgment of the Division Bench of Delhi High Court is well placed. We have noted that the Delhi High Court and even after exhaustive amendment to Section 2(22)(e) held that the payment made to any concern would not come within the purview of this subclause so long as it contemplated shareholders. The Division Bench of Delhi High Court has made detailed reference to all the decisions in the field. It has also referred to the order passed by the Special Bench of the Tribunal in arriving at the same conclusion. In the Commissioner of Income Tax v/s Ankitech Pvt Ltd reported in 2012 (340) ITR page 14, the Hon'ble Delhi High Court referred to both Sarathy Mudaliar and Rameshwarlal Sanwarmal (supra), extensively. It also referred to the arguments of the Revenue which are somewhat similar to those raised before us. It is in dealing with these arguments that the Division Bench concluded that all the three limbs of the section analyzed in Universal Me ..... X X X X Extracts X X X X X X X X Extracts X X X X
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