TMI Blog2010 (12) TMI 1179X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition of ₹ 16,79,850/- on account of excess claim of premium paid on plot. 3. The brief facts leading to the above issue are that assessee has claimed a sum of ₹ 18,66,452/- as premium paid on plot allotted by Gujarat Maritime Board (GMB for short) and assessee claimed the same in its business of ship breaking as it has obtained that plot on lease from GMB. The assessee paid this amount as premium on leasehold property. According to Assessing Officer, the assessee has acquired this plot from GMB under lease and Lease Agreement was for ten years and accordingly this is a capital asset and payment made for acquiring capital asset is capital expenditure. Accordingly, he allowed deduction only of 1/10th expenditure and disallowed the balance amount of ₹ 16,79,850/-. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) allowed the claim of assessee by giving following findings in para-4.2 of his appellate order:- 4.2 I have considered the submissions of the A.R carefully. The appellant has procured a lease hold plot from Gujarat Maritime Board for the purpose of its business of ship breaking. The appellant interchanged the plot originally allot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der:- Plot No. Period Amount of plot premium claimed. V-5 1.10.2004 to 30.09.2005 Rs.8,10,000 V-5 01.12.2002 to 30.09.2004 Rs.8,74,200 Plot No.119 1.10.1994 to 30.09.2004 Rs.1,82,250 In view of the above fact, the total premium for the period from 01-10-2004 to 30-09- 2005 was ₹ 16.20 lakh and the assessee has claimed a sum of ₹ 8.10 lakh for this period. The balance amount of ₹ 8,74,200/- was claimed for the period from 01-12-2002 to 30-09-2004 and ₹ 1,82,250/- for the period ending 30th September,2004. In view of this face, we are of the view that the assessee has rightly claim deduction of ₹ 18,66,460/-, which was allowed by CIT(A). We confirm the order of CIT(A) and this issue of Revenue s appeal is dismissed. 5. The next issue in this appeal of Revenue is against the order of CIT(A) deleting the addition made by invoking the provisions of Deemed Dividend u/s.2(22)(e) of the Act. For this, Revenue has raised the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In re [2005] reported in 274 ITR 609 (AAR). The head notes in this case read as under:- Section 2(22)(e) of the Income-tax Act, 1961, is a deeming provision and it is well settled that it has to be construed strictly. To attract subclause (e) the shareholder must be a registered shareholder, CIT v. C.P. Sarathy Mudaliar [1972] 83 IUTR 170 (SC); Nandlal Kanora v. CIT [1980] 122 ITR 405 (Cal) and Rameshwarlal Sanwarmal v CIT [1980] 122 ITR 1 (SC) followed. The applicant was an Indian company and a resident I India. It proposed to advance to CFL, a non-resident company incorporated in the UK, interest hearing loan out of accumulated profits within the meaning of Explanation 2 to section 2(22)(e) of the Income-tax Act, 1961 CFL, the UK company, did not by itself hold any shares in the applicant. Another UK company CHL (main company), was the holding company of CFL, and some subsidiaries (other than CFL) of CHL and JPC held shares in the applicant. The applicant stated case to the Authority for a ruling on the question whether the amount of the proposed loan could be treated as deemed dividend under section 2(22)(e) to the extent of the accumulated profits. On the facts stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances of the case. We find from the assessment order that the Assessing Officer observed that M/s. MIPL is a company in which the public is not substantially interest and one of the Director, Shri K.K Bansal holds more than 20% of share both in the assessee-company and M/s MRPL, the AO further observed that as per the books of account, M/s. MRPL has advanced huge sum to M/s MRPL i.e. the assessee-company and MIPL have shown reserves and surplus at ₹ 1,01,54,414/-. The AO therefore observed that the loans and advances made by MIPL to MRML is liable to taxed as deemed dividend. In response to the show cause notice asking the assessee to explain why the amount should not be treated as deemed dividend u/s.2(22)(e), the assessee filed written submissions dated 22-12-2007 which had been reproduced by the AO at para-7.3 in assessment order. It was explained to the AO in the course of assessment proceedings that the assessee-company is not holding a single share in MRML and the aforesaid fact can also be ascertained from the chart which has been produced by the A.O in para-7.1 of the assessment order. The AO without appreciating the relevant facts in proper perspec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the share-holder or the concern (non-shareholder). The provisions are ambiguous. IT is therefore necessary to examine the intention behind enacting the provisions of section 2(22)(e) of the Act. 35. The intention behind enacting the provisions of section 2(22)(e) is 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 shareholder 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 section 2(22)(e) is to tax dividend in the hands of shareholder. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of dividend is extended to a loan or advance to a non-shareholder the ordinary and natural meaning of the word dividend is taken away. In the light of the intention behind the provisions of section 2(22)(e) and in the absence of indication in section 2 (22)(e) to extended the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a non-shareholder cannot be taxed as deemed dividend in the hands of a non-shareholder. 38. The basic characteristic of dividend as held by the apex court in the case of Kantilal Manilal v. CIT [1961] 41 ITR 275 is a share of profits of the company given to its shareholders. Further, section 206 of the Companies Act, 1956, prohibits payment of dividend to any person other than the registered shareholder. If one were to break up the natural meaning the following components emerge (a) dividend is a share of profits of the company (b) paid to its shareholders. Section 2(22) of the Act artificially extends the scope of dividend from being more than only a distribution of profits to cover certain other types disbursements such as loans paid, etc. (the first ingredient mentioned above). It does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antial interest in the concern. The above provisions also therefore contemplate deemed dividend being taxed in the hands of a shareholder only. For the reasons stated above, we are of the view that the law laid down in the case of Nikko Technologies Ltd. (supra) is not correct. We, therefore, hold that deemed dividend under section 2(22)(e) of the Income-tax Act, 1961, can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other person. 41. In the light of the above discussion, the questions referred to the Special Bench are answered as follows: On the first question: Deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. On the second question: The expression shareholder referred to in section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of section 2(22)(e) will not apply. 42. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the provisions of section 2(22 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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