2011 (5) TMI 325 - HC - Income Tax

Section 2(22)(e) inapplicable where payer advances were business transactions and recipient wasn't registered or beneficial shareholder

HC held Section 2(22)(e) inapplicable: the assessee was not a shareholder (registered or beneficial) of the payer and thus could not be taxed as deemed ... Interpretation of Section 2(22)(e) - Deemed dividend - word 'shareholder' - expression 'shareholder being a person who is the beneficial owner of shares' - assessee company had received advances by way of book entry from JGPL and the shareholders having substantial interest in the assessee company were also having 10% of the voting power in JGPL. - Held that:- No doubt, the legal fiction/deemed provision created by the Legislature has to be taken to 'logical conclusion' as held in Andaleeb Sehgal (2010 (9) TMI 774 - DELHI HIGH COURT). The Revenue wants the deeming provision to be extended which is illogical and attempt is to create a real legal fiction, which is not created by the Legislature. - the definition of shareholder is not enlarged by any fiction - The assessee who was recipient of the amount was not the shareholder in the payer company and therefore, provisions of Section 2(22)(e) of the Act were not applicable. - Even the money which was paid was not in the nature of loan or advance simplicitor, but the amounts were advanced for business transaction. Deemed dividend - liability of the shareholder - scope of the term 'shareholder' for the purpose of section 2(22)(e) - beneficial share holder versus registered shareholder - The expression 'shareholder being a person who is the beneficial owner of shares' referred to in the first limb of Section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial then the provision of Section 2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the first limb of provisions of Section 2(22)(e) will not apply. The concept of 'voting power' was in built on the provisions of sec.2(22)(e) as it existed prior to 1987 amendment. The insertion of the words 'beneficial owner of shares holding not less than 10% of the voting power' to '10% of voting power' - A beneficial owner of shares cannot exercise voting power because to exercise the right to vote his/her name must appear in the register of members. - In this view of the matter, it will not be correct to say that the ratio laid down by Hon'ble Supreme Court in Rameshwarlal Sanwarmal Vs. CIT (1979 (12) TMI 1 - SUPREME COURT] that word 'shareholder' in section 2(22)(e) is no more applicable. - Though the appeal has to fail on the ground that the assessee cannot be taxed as it is not a shareholder in M/s. Teletube Electronics Ltd., even on the aforesaid ground, i.e., it was not having 10/20% shareholding in M/s. Teletube Electronics Ltd., non-applicability of Section 2(22)(e) of the Act is apparent. Issues Involved:1. Deletion of addition under Section 2(22)(e) of the Income Tax Act.2. Interpretation of Section 2(22)(e) regarding deemed dividend.3. Applicability of deemed dividend to non-shareholders.4. Perverse nature of ITAT's order.Detailed Analysis:1. Deletion of Addition under Section 2(22)(e) of the Income Tax Act:The primary issue was whether the Income Tax Appellate Tribunal (ITAT) was correct in deleting the addition of Rs. 6,32,72,265 made by the Assessing Officer (AO) under Section 2(22)(e) of the Income Tax Act. The AO had added this amount as deemed dividend in the hands of the assessee company, which had received advances from Jackson Generators (P) Ltd. (JGPL). The shareholders of JGPL, who had substantial voting power, also had significant interests in the assessee company. The ITAT deleted the addition on the grounds that the assessee company was not a shareholder in JGPL, and thus, the amount could not be treated as dividend in its hands.2. Interpretation of Section 2(22)(e) Regarding Deemed Dividend:Section 2(22)(e) of the Income Tax Act was discussed in depth. The provision deems certain payments by a company to its shareholders or to concerns in which such shareholders have substantial interests as dividend, provided the company has accumulated profits. The Tribunal relied on the Special Bench decision in ACIT vs. Bhaumik Colour (P) Ltd., which was affirmed by the Bombay High Court in CIT vs. Universal Medicare (P) Ltd. The provision was interpreted to mean that deemed dividend can only be taxed in the hands of the shareholder and not in the hands of a non-shareholder entity, even if it receives the payment.3. Applicability of Deemed Dividend to Non-Shareholders:The court examined whether the deemed dividend under Section 2(22)(e) could be taxed in the hands of a non-shareholder. It was held that the provision creates a fiction to treat certain payments as dividends but does not extend this fiction to treating the recipient concern as a shareholder. Therefore, the deemed dividend should be taxed in the hands of the actual shareholders who have substantial interests in both the payer and recipient companies. The court emphasized that the legal fiction created by Section 2(22)(e) should not be extended beyond its intended purpose.4. Perverse Nature of ITAT's Order:The Revenue argued that the ITAT's order was perverse as it did not correctly interpret Section 2(22)(e) and allowed the assessee to escape taxation on the deemed dividend. However, the court found that the ITAT's interpretation was consistent with the legal precedents and the intention behind the provision. The court reiterated that the deemed dividend should be taxed in the hands of the shareholders, not the recipient concern.Conclusion:The court upheld the ITAT's decision to delete the addition made by the AO under Section 2(22)(e) of the Income Tax Act. It was concluded that the deemed dividend could not be taxed in the hands of the assessee company, which was not a shareholder in JGPL. The deemed dividend should be assessed in the hands of the shareholders who have substantial interests in both the payer and recipient companies. The appeals were dismissed, and the questions were answered in favor of the assessee and against the Revenue.