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TMI Blog2008 (11) TMI 273X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of Section 2(22)(e) (in bold letters), relevant part of which reads: (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 or otherwise) (made after the 31st May, 1987, 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 ten per cent of voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest.... According to the assessee, the shares were held in the names of three trustees for and on behalf of the trust, NNT and that the beneficiaries of the trust were five in number and none of the trustees were also beneficiaries of the trust. The assessee contended that to invoke the second limb of the provisions of Section 2(22)(e) the primary condition was that NNT must be both a registered shareholder and also beneficial shareholder. Since the trustees of NNT held the shares on behalf of the trust only as legal owners and were not the beneficial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether deemed dividend under Section 2(22)(e) of the IT Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender ? 2. Whether the words "such shareholder" occurring in Section 2(22)(e) refer to a shareholder who is both the 'registered' shareholder and the beneficial shareholder ? 8. The President by order dt. 10th Oct., 2007 has directed the hearing of the entire appeal and the two questions formulated as above for consideration by the Special Bench. 9. M/s Weaveland, Panipat, Haryana, have sought permission and were granted permission to appear as intervener before the Special Bench. The facts in the case of the intervener viz., Asstt. CIT v. Weaveland ITA No. 5036/Del/2008, are as follows : M/s Weaveland is a partnership firm. It had various transactions of receipts and payments of money with M/s Paliwal Industries (P) Ltd. (PIPL). There were four partners in the firm M/s Weaveland. These four partners held shares in PIPL, the details of which were as follows: 1. Mr. Avinash Chander Sharma 30% 2. Mrs. Rani Paliwal 27.50% 3. Mr. Abhishek Paliwal 30% 4. Mr. Sandeep Goyal 12.5% The above four persons shared the profits of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red shareholder; and (ii) The shareholder should also be a beneficial owner of the shares. Thus, according to him the second question formulated for consideration by the Special Bench has to be answered as above. It was submitted by him that in the case of the assessee, the common shareholder was a trust. Share certificates are in the name of the trustees. Thus, the registered holders are the trustees, whereas the beneficial owners are the beneficiaries of the trust. The trustees and beneficiaries were different individuals. Hence, the primary condition for invoking Section 2(22)(e) is not fulfilled and consequently Section 2(22)(e) does not apply to the case of the assessee. 12. On the first question formulated for consideration by the Special Bench, according to him the same does not arise for consideration in his case but nevertheless, he relied on the decision of the Hon'ble Rajasthan High Court in the case of CIT v. Hotel Hilltop (2008) 217 CTR (Raj) 527, wherein it has been held by the Hon'ble Rajasthan High Court that deemed dividend cannot be brought to tax in the hands of a non-shareholder. 13. The learned Counsel for the intervener filed written submissions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not correct to say that dividend is always linked to a payment by a company to its shareholders. In this regard he referred to the provisions of Section 8(a) of the Act which lays down that for the purposes of inclusion in the total income of an assessee any dividend declared by a company or distributed or paid by it within the meaning of Sub-cls (a) to (e) of Clause 22 of Section 2 shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be. It was submitted by him that by the aforesaid provisions a charge to tax in the hands of the non-shareholder is also possible. (iv) According to him the Hon'ble Rajasthan High Court in the case of Hotel Hilltop (supra) has not dealt with the second limb of Section 2(22)(e) of the Act and that case only dealt with the third limb of Section 2(22)(e) of the Act. 15. We have considered the rival submissions. The historical background of Section 2(22)(e) is as follows: (a) Section 2(6A)(e) of the IT Act, 1922, as introduced by the Finance Act, 1955 corresponding to Section 2(22)(e) of the IT Act, 1961 was as follows: Any payment by a company, not being a company in which the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the previous year, beneficially entitled to not less than twenty per cent of the income of such concern. 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 per cent of the voting power. 16. Under the 1922 Act, two categories of payments were considered as dividend viz., (a) any payment by way of advance or loan to a shareholder was considered as dividend paid to shareholder; or (b) any payment by any such company on behalf or for the individual benefit of a shareholder was considered as dividend. 17. In the 1961 Act, the very same two categories of payments were considered as dividend but an additional condition that payment should be to a shareholder being a person who is the beneficial owner of shares and who has a substantial interest in the company viz., shareholding which carries not less than twenty per cent of the voting power, was introduced. 18. By the 1987 amendment w.e.f. 1st April, 1988, the condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration. In the said case, members of HUF acquired shares in a company with the fund of the family. Loans were granted to HUF and the question was whether the loans could be treated as dividend income of the family falling within Section 2(6A)(e) of the Act, 1922. The apex Court held that only loans advanced to shareholders could be deemed to be dividends under Section 2(6A)(e) of the Act; the HUF could not be considered to be a 'shareholder' under Section 2(6A)(e) of the Act and hence, loans given to the HUF will not be considered as loans advanced to "shareholder" of the company and could not, therefore, be deemed to be its income. The apex Court further held that when the Act speaks of shareholder it refers to the registered shareholder. 21. The aforesaid decision of the apex Court in the case of C.P. Sarathy Mudaliar (supra) has been followed by the apex Court in the case of Rameshwarlal Sanwarmal v. CIT (supra). In this case, the company advanced the loans to the assessee HUF who was the beneficial owners of the shares in the company, but the shares were registered in the name of the individual Karta, who held the shares for and on behalf of the HUF. On the above facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpretation of statutes that where once certain words in an Act have received a judicial construction in one of the superior Courts, and the legislature has repeated them in a subsequent statute, the legislature must be taken to have used them according to the meaning which a Court of competent jurisdiction has given them. 23. In the 1961 Act, the word "shareholder" is followed by the following words "being a person who is the beneficial owner of shares". This expression used in Section 2(22)(e), both in the 1961 Act and in the amended provisions w.e.f. 1st April, 1988 only qualifies the word "shareholder" and does not in any way alter the position that the shareholder has to be a registered shareholder. These provisions also do not substitute the aforesaid requirement to a requirement of merely holding a beneficial interest in the shares without being a registered holder of shares. The expression "being" is a present participle. A participle is a word which is partly a verb and partly an adjective. In Section 2(22)(e), the present participle "being" is used to described the noun 'shareholder' like an adjective. The expression "being a person who is the beneficial owner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h an expression "no such application" in the context of Rule 97 of the Rajasthan High Court Rules, 1952 has held as follows: Generally the word 'such' refers only to previously indicated, characterized or specified. 'Such' is an adjective meaning, the one previously indicated or refers only to something which has been said before. The Hon'ble Allahabad High Court in the case of Mohan Lal and Anr. v. Grain Chambers Ltd. AIR 1959 All 279 has held as follows: In fact, it appears to us that the word 'such' is used before a noun in a latter part of a sentence, the proper construction in the English language is to hold that the same noun is being used after the word 'such' with all its characteristics which might have been indicated earlier in the same sentence. (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 per cent of the income of such concern; and where the concern is a company he must be the owner of shares, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Similarly, if a person is a beneficial shareholder but not a registered shareholder then also the provisions of Section 2(22)(e) will not apply. 29. In view of the fact that the assessee was not holding beneficial interest in shares of BPCL and UPPL, there is no requirement of answering the first question that arises for consideration in the case of the assessee viz., as to whether deemed dividend under Section 2(22)(e) of the IT Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender ? However, in the case of the intervener viz., Asstt. CIT v. Weaveland ITA No. 5036/Del/2008 (supra) this question needs to be answered. The facts in the case of the intervener have already been narrated earlier and are not being repeated here. 30. At the outset it has to be mentioned that provisions of Section 2(22)(e) which brought in a new category of payment which was to be considered as dividend as introduced by the Finance Act, 1987 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 attract the liability of tax on the person, on whose behalf, or for whose individual benefit, the amount is paid by the company, whether to the shareholder, or to the concerned firm. In which event, it would fall within the expression 'deemed dividend'. Obviously, income from dividend is taxable as income from the other sources under Section 56, and in the very nature of things the income has to be of the person earning the income. The assessee 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 firms, but then, thereby the deemed dividend would not be deemed di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he recipient of the payment from the company. The Tribunal has thereafter referred to Circular No. 495, dt. 22nd Sept., 1987 of the CBDT wherein it has been opined that deemed dividend would be taxed in the hands of a concern (non-shareholder) also if the conditions mentioned in the section are satisfied. 34. We are of the view that the provisions of Section 2(22)(e) do not spell out as to whether the income has to be taxed in the hands of the shareholder 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 provisions of Section 2(22)(e) are 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 shareholders or to concern in which such shareholde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 the definition of the term "dividend" can be said to operate. If the definition 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 extend 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 (SC) 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off. In the event of the payment of loan or advance by a company to a concern being treated as dividend and taxed in the hands of the concern then the benefit of set off cannot be allowed to the concern, because the concern can never receive dividend from the company which is only paid to the shareholder, who has substantial 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 (I) (P) Ltd. (supra) is not correct. We therefore hold that deemed dividend under Section 2(22)(e) of the IT Act, 1961 can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other 42. 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) refe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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