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M/s. Jet Age Securities Pvt. Ltd. Versus D.C.I.T., Circle-7 (1) , Kolkata

Deemed dividend addition u/s. 2(22)(e) - Held that:- The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word “Dividend” is extended to loans and advances to a shareholder or to a concern in which a shareholder is substantially interested deeming them as Dividend in the hands of a shareholder the ordinary and natural meaning of the word “Dividend” is altered. To this extent th .....

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d Dividend in the hands of a non-shareholder. Since the Assessee in the present case is not a shareholder in the lender company, addition to be deleted. - Decided in favour of assessee

Revision u/s 263 - Held that:- We are of the view that the order of CIT cannot be sustained as in any case there can be no addition and there can be no prejudice to the interest of the revenue in as much as no addition on account of deemed dividend u/s.2(22)( e ) can be made in the facts and circumstanc .....

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e that the assessee had received loan from M/s Jet Age Finance Limited (JAFL) of ₹ 1,88,75,000/-. The CIT was of the view the said amount received as loan should be treated as deemed dividend u/s. 2(22)(e) of the Income Tax Act, 1961 (Act). The assessee submitted that it was not a shareholder in JAFL and consequently the amount could not be held to be deemed dividend by applying the provisions of section 2(22)(e) of the Act. 3. The CIT however, was of the view that though the Assessee was .....

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tting aside the order of the AO and directing the AO to conduct necessary examination to consider the applicability of Sec.2(22)( e) of the Act. 4. Aggrieved by the order of the CIT the Assessee has preferred the present appeal before the Tribunal. 5. None was present on behalf of the Department. Mr.Vivek Verma JCIT, Sr.DR, present submitted that the case is not allotted to him and expressed his inability to inform the bench as to why the revenue is not being represented in this appeal. Since ap .....

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or otherwise) made after the 31-5-1987, 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 .....

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ing the previous year, beneficially entitled to not less than twenty percent of the income of such concern; 6.1. Section 2(32) defines the expression person who has a substantial 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 percent of the voting power. 6.2. An analysis of the above provisions sh .....

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ts) 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. 6.3. In the present appeal we are concerned with the se .....

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of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power. This is because of the expression Such Shareholder found in the relevant provision. This expression only refers to the shareholder referred to in the earlier part of Sec.2(22)(e) viz., a registered and a beneficial holder of shares holding 10% voting power. (c)The very same person referred to in (b) above must also be a member or a partner in the concern holding substant .....

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by the company to the concern will be dividend. 6.4. The Special Bench of ITAT, Mumbai, in the case of Bhaumik Color Labs ITA 5030/M/04, 118 ITD 1 (SB) (Mum), considered the question Whether deemed dividend u/s. 2(22)(e) of the Income Tax Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender? The Special Bench held that 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 othe .....

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ether in the hands of the concern or the shareholder . We have already seen the divergent views on this issue which have been referred to in the earlier part of this order. 31. The above provisions were subject matter of consideration before the Hon ble Rajasthan High Court in the case of CIT Vs. Hotel Hilltop. 217 CTR 527(Raj). The facts of the case before the Hon ble Court were as follows. The Assessee was one M/S.Hotel Hilltop a partnership firm. This firm received an advance of ₹ 10 la .....

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of the firm because the two partners of M/S.Hotel Hill Top were holding shares by which they had 10% voting power in M/S.Hill Top Palace Hotels (P) Ltd. They were also entitled to 20% of the income of the firm M/S.Hotel Hill Top. Therefore the loan by M/S.Hill Top Palace Hotels (P) Ltd. To the firm M/S.Hotel Hill Top was treated as deemed dividend in the hands of M/S.Hotel Hill Top, the firm under the Second limb of Sec.2(22)(e) of the Act. The CIT(A) held that since the firm was not the shareho .....

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Act? The Hon ble Court held as follows:- The important aspect, being the requirement of section 2(22)(e) is, that the payment may be made to any concern, in which such shareholder is a member, or the partner, and in which he has substantial interest, or any payment by any such company, on behalf or for the individual benefit of any such shareholder ……. Thus, the substance of the requirement is that the payment should be made on behalf of or for the individual benefit of any such s .....

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in the present case is not shown to be one of the persons, being shareholder. Of course, the two individuals being R and D. are the common persons, holding more than requisite amount of shareholding and are having requisite interest, in the firm, but then, thereby the deemed dividend would not be deemed dividend in the hands of the firm, rather it would obviously be deemed dividend in the hands of the individuals, on whose behalf, or on whose individual benefit, being such shareholder, the amoun .....

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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. The argument of the learned D.R. that the Hon ble Rajasthan High Court did not deal with the second limb of Sec.2(22)(e) of the Act is not correct. 6.5. The Special Bench further held as follows:- 34. We are of the view that the provisions of Sec.2(22)(e) does not spell out as to whether the income has to be taxed in the hands of the shareholder or the c .....

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dend income would became taxable in the hands 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 section 2(22)(e) is to tax d .....

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n the amendment to Sec.2(22)(e) of the Act by the Finance Act, 1987 w.e.f 1-4-88 is to ensure that persons who control the affairs of a company as well as that of a firm can have the payment made to a concern from the company and the person who can control the affairs of the concern can drawn the same from the concern instead of the company directly making payment to the shareholder as dividend. The source of power to control the affairs of the company and the concern is the basis on which these .....

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ceipt should be in the nature of income. Therefore the deeming fiction can be applied only in the hands of the shareholder and not the non-shareholder viz., the concern. 37. The definition of Dividend U/s.2(22)(e) of the Act is an inclusive definition. Such inclusive definition enlarges the meaning of the term Dividend according to its ordinary and natural meaning to include even a loan or advance. Any loan or advance cannot be dividend according to its ordinary and natural meaning. The ordinary .....

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