2012 (7) TMI 1146 - AT - Income Tax

Court rules amount received not taxable as deemed dividend under Income Tax Act; shareholder status key.

The court held that the amount received could not be taxed as deemed dividend in the hands of the assessee under Section 2(22)(e) of the Income Tax Act, ... - 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the amount of Rs. 91,52,551 received by M/s Shiva Commodities & Derivatives from M/s Jai Siya Ram Commodity Trading (P) Ltd. could be taxed as deemed dividend in the hands of the assessee under Section 2(22)(e) of the Income Tax Act, 1961.Whether the assessee qualifies as a beneficial shareholder for the purposes of Section 2(22)(e) of the Income Tax Act, 1961.Whether the amount in question was a loan or advance and if it was covered by the provisions of Section 2(22)(e) in terms of accumulated profits.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Taxation of Deemed DividendRelevant legal framework and precedents: Section 2(22)(e) of the Income Tax Act, 1961, defines deemed dividend and specifies the conditions under which loans or advances by a company can be taxed as dividends. The court considered the precedents set by the ITAT in Ankitech Pvt. Ltd. and the Special Bench decision in ACIT vs. Bhaumik Colour (P) Ltd.Court's interpretation and reasoning: The court noted that the provisions of Section 2(22)(e) are intended to tax dividends in the hands of the shareholder, not the concern receiving the loan or advance. The court emphasized that the intention behind the provision is to prevent tax avoidance by distributing profits as loans rather than dividends.Key evidence and findings: The assessee held 2/3rd of the shares in the company providing the loan and had a 50% interest in the firm receiving the loan. However, the court found that the assessee was not a beneficial shareholder in the context of the transaction.Application of law to facts: The court applied the principles from the Bhaumik Colour case, which required the recipient of the deemed dividend to be both a registered and beneficial shareholder. Since the assessee did not meet these criteria, the provisions of Section 2(22)(e) were not applicable.Treatment of competing arguments: The Revenue argued that the assessee was both a registered and beneficial shareholder, but the court found this argument unpersuasive based on the precedents and the specifics of the case.Conclusions: The court concluded that the amount could not be taxed as deemed dividend in the hands of the assessee.Issue 2: Beneficial Shareholder StatusRelevant legal framework and precedents: The definition of a shareholder under Section 2(22)(e) requires the individual to be both a registered and beneficial shareholder. The court referenced the Bhaumik Colour case and the Bombay High Court decision in Universal Medicare Pvt. Ltd.Court's interpretation and reasoning: The court emphasized that the intention of the legislature is to tax only the shareholder who has a substantial interest in the company and is the actual beneficiary of the loan or advance.Key evidence and findings: The court found that the assessee was not the beneficial shareholder of the shares in question, which precluded the application of Section 2(22)(e).Application of law to facts: The court applied the principle that both registered and beneficial ownership must be present for the deemed dividend provisions to apply.Treatment of competing arguments: The court dismissed the Revenue's assertion that the assessee was a beneficial shareholder, relying on the legal interpretation from previous cases.Conclusions: The court concluded that the assessee was not a beneficial shareholder, and therefore, the deemed dividend provisions did not apply.Issue 3: Nature of Loan or AdvanceRelevant legal framework and precedents: The court considered the requirement under Section 2(22)(e) that the loan or advance must be made from accumulated profits.Court's interpretation and reasoning: The court noted the necessity of determining the nature of the loan or advance and whether it was made from accumulated profits.Key evidence and findings: The court found that neither the Assessing Officer nor the CIT(A) had ascertained the amount of accumulated profits or the exact nature of the loan or advance.Application of law to facts: The court remanded the case to the CIT(A) to ascertain the accumulated profits and the nature of the loan or advance.Treatment of competing arguments: The court acknowledged the argument that the loan was a trade advance but required further factual determination.Conclusions: The court set aside the CIT(A)'s order and remanded the case for further factual determination regarding accumulated profits and the nature of the loan.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: '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 its 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.'Core principles established: Deemed dividends under Section 2(22)(e) can only be taxed in the hands of a shareholder who is both a registered and beneficial owner of shares. The provisions are not applicable to non-shareholders or concerns.Final determinations on each issue: The court concluded that the deemed dividend provisions did not apply to the assessee as he was not a beneficial shareholder. The case was remanded to ascertain the accumulated profits and the nature of the loan or advance.