TMI Blog2008 (6) TMI 611X X X X Extracts X X X X X X X X Extracts X X X X ..... Ms. Rukmani Gupta 45.1% (3) Manmohan Chadha 9.8% The shareholding pattern of M/s. Jackson Generators P. Ltd. hereinafter referred to JGPL was: 1) Mahesh Kumar Gupta 43.19% (2) Ms. Rukmani Gupta 26.46% (3) Manmohan Chadha 30.35% 3. The Assessing Officer on the ground that the assessee had received advances from JGPL held that the amounts received should be treated as deemed dividend under section 2 (22) (e) of the IT Act 1961. The assessee had submitted that the assessee was not the registered shareholders in JGPL and that the advances were notional payments or book entry and for such loans the provisions of section 2(22)(e) did not apply. The Assessing Officer did not accept the contentions of the assessee and proceeded to tax the deemed dividend in the hands of the assessee. 4. Aggrieved the assessee had filed first appeal to the Commissioner of Income-tax (Appeals) who had confirmed the assessment. Aggrieved the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her submission that the shareholder as used in section 2(22)(e) meant a registered shareholder. For this proposition he relied upon the decision of the Hon'ble Supreme Court in the case of C.P.Sarathy Mudaliar referred to supra. He further submitted that no legal fiction had been provided to treat, the concern being, the assessee as shareholder. In the absence of such a deeming provision the concern though defined in section 2 (22) (e) cannot be taxed. For this proposition he relied upon the decision of Hon'ble Madras High Court in the case of G.R. Govindarajulu Naidu reported in 90 ITR 13 wherein the Madras High Court had held that for invoking the deeming provisions of section 2(6A) the loan must be by a company to its registered shareholder as otherwise the said section will create a deemed dividend even when there is a loan by the company to the person other than a shareholder which the company cannot do under section 206 of the Companies Act. Section 2(6A) does not empower the company to pay dividends to persons other than its registered shareholder. In the circumstances, section 2(6A) (e) cannot be invoked unless the legislature introduces a further deeming provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission that the assessee was an industrial undertaking in Backward States specified in the Eighth Schedule and as per the provisions of section 80 IB (4) the profits and gains derived by the assessee industrial undertaking was exempted under the provisions of section 80IB. It was his submission that the Assessing Officer and the ld. Commissioner of Income-tax (Appeals) had not considered this issue. It was the submission that the deemed income if it is to be considered as taxable in the hands of the assessee would have to be exempted under the provisions of section 80 IB (4). It was the submission that the deemed income would be the income derived from the industrial undertaking and thus the income would be eligible for the deduction under section 80IB(4). He further submitted that the wordings of the 80 IB (4) were the income derived from the industrial undertaking and not the income derived from the business of the industrial undertaking. Thus, it was the submission that any income derived from the industrial undertaking was exempted and the provisions of section 80 IB (4) should not be restricted to the income derived from the business of the industrial undertaking. It was the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also JGPL, were closely held companies and the Guptas were the beneficial shareholders in both the companies and thus the provisions of section 2(22)(e) applied. It was the submission that the provisions of section 2(22)(e) had been introduced to bring to tax the deemed dividend as in certain cases companies having accumulated profits and the companies in which the substantial voting power lied in the hands of the persons other than the public and who have not distributed such accumulated profit as dividend to the shareholders, in order to avoid paying tax, the controlling group does what it likes with the management of the company, its affairs and its profits and such accumulated profits is transferred under the guise of loans and advance to avoid paying taxes. It was the submission that as the legislature realized that such funds are available with the company in the form of profits were being advanced by way of loans and advances to shareholders so as to avoid payment of tax on the accumulated profits the legislature had introduced the provisions of section 2(22)(e). It was the submission that the accumulated profits of JGPL had been advanced to the assessee company and conseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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) xxxxxxxxxxxxxxxxx (ia) xxxxxxxxxxxxxxxxx (ii) xxxxxxxxxxxxxxxxx (iii) any dividend paid by a company which is set-off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within, the meaning of sub-clause (e), to the extent to which it is so set-off; (iv) xxxxxxxxxxxxxxxxx (v) xxxxxxxxxxxxxxxxx Explanation 3 to section 2(22) (e) is also important and is also extracted below:- Explanation 3: For the purposes of this clause,- (a) concern means a Hindu undivided family, or a firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered in its register of members, shall be a member of the company. (3) Every person holding equity share capital of company and whose name is entered as beneficial owner in the records of the depository shall be deemed to be a member of he concerned company.]. 12. Reading of the said section from the Companies Act shows that the terms member and shareholders are synonymous under the Companies Act and it is clear that in so far as the company is concerned a person would be recognized as its member or shareholder only when his name is entered in the register of members. This view of ours find support from the decision of the Hon'ble Allahabad High Court in the case of Raj Kumar Singh and Co. reported in 199 CTR 88 (Allh.). 13. The modification to the provision of section 2(22) (e) as done by the Finance Act to include advances or loans made to any concern in which such shareholder is a member or partner and in which he has substantial interest shows that the legislature intended to bring to tax even such cases where the concern per se might not be a shareholder in the payer company but the shareholder or the members or the partners in the payer company has sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be reduced. This is because in a closely held company the information of deemed dividend that has suffered tax would be available to the payer company. 14. In regard to the submissions that the person referred to in section 2(22)(e) referred to individual and not to a company; firm, etc. we are of the view that as the Income Tax Act 1961 itself has given a definition to the term person in section 2(31) of the Act. Such definition would be applicable to all the provisions of the Act until and unless specifically excluded. This is because the opening words of the provisions of section (2) specify that in this Act unless the context otherwise requires the definitions are specified. The section 2(22) (e) does not give a context to give the term person another definition other than that which is provided under the Act in section 2(31). Our view finds support from the decision of the Hon'ble Bombay High Court in the case of Sadana Textile Mills Pvt. Ltd. reported in 188 ITR 318. In the circumstances, this submission made on behalf of the assessee also stands rejected. In regard to the submission that the computation of deemed dividend as made by the Assessing Officer is not a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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