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2018 (3) TMI 305

TMI 325 - DELHI HIGH COURT] is squarely applicable to the facts of the Assessee’s case. - Decided against revenue. - I.T.A No. 118/Kol/2017 - Dated:- 1-3-2018 - Sri N.V.Vasudevan, JM And Shri Waseem Ahmed, AM For The Appellant : Shri Arindam Bhattacharjee, Addl. CIT For The Respondent : Shri Soumitra Chowdhury, Advocate ORDER Per N.V.Vasudevan, JM This is an appeal by the Revenue against the order dated 04.11.2016 of C.I.T.(A)-18, Kolkata relating to A.Y.2012-13. 2. The only issue that arises for consideration in this appeal by the revenue is as to whether the CIT(A) was justified in coming to the conclusion that a sum of ₹ 2,08,97,808/- received by the assessee as a loan from M/s. Shining Emotional Surplus (P)Ltd cannot be taxed as deemed dividend in the hands of the assessee by invoking the provision of section 2(22)(e) of the Income Tax Act, 1961 (Act). 3. The admitted factual position is that the assessee was not a share holder of M/s. Shining Emotional Surplus (P)Ltd from whom the loan was taken. However one Mr. S.B.Renee Jhola was the common shareholder and director of the assessee company as well as M/s. Shining Emotional Surplus (P)Ltd holding 95% of the shares in bot .....

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placed reliance on the decision of Hon ble Delhi High Court in the case of CIT Vs. Ankitech Pvt.Ltd. & others 340 ITR 14 (Del.) taking a view that deemed dividend cannot be taxed in the hands of a non shareholder. Reliance was placed on the fact that the Hon ble Supreme Court in CIT Vs. Madhur Housing and Development company in Civil Appeal No.3961 of 2013 judgement dated 5.10.2017, wherein the Hon ble Supreme Court confirmed the view taken by the Hon ble Delhi High Court in the case of CIT Vs. Ankitech Pvt.Ltd. & others 340 ITR 14 (Del.). 7. We have heard the submissions of the learned counsel for the Assessee. The provisions of Sec.2(22)(e) of the Act, reads as follows: (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 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 .....

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category of payment to be regarded as Dividend. They are:- (a) There must be a payment to a concern by a company. (b) A person must be Shareholder of the company being a registered holder and 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. 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 substantial interest in the concern viz., when the concern is not a company, he must at any time during the previous year, be beneficially entitled to not less than twenty percent of the income of such concern; and where the concern is a company he must be the 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 pow .....

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d 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 shareholder of the company the assessment as deemed dividend in the hands of the firm was not correct. The order of the CIT(A) was confirmed by the Tribunal. On Revenue s appeal before the Hon ble High Court, the following question of law was framed for consideration:- Whether on the facts and in the circumstances of the case and in law the learned Tribunal was justified in upholding the order of learned CIT(A) deleting the addition of Rs.10 lacs as deemed dividend under Section 2(22)(e) of the IT 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 shareholder, obviously, the provision is intended to a .....

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as dividend because if so distributed the dividend 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 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 it s shareholder has substantial interest, is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern. 36. The basis of bringing in 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 a .....

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