2018 (1) TMI 1159 - SC - Income Tax

Beneficial ownership of 10% shares sufficient for Section 2(22)(e) deemed dividend provisions without registered ownership requirement (22)(e)

National Travel Services Versus Commissioner of Income Tax, Delhi, VIII

National Travel Services Versus Commissioner of Income Tax, Delhi, VIII - [2018] 401 ITR 154 (SC) Issues Involved:1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961, as amended in 1988.2. Whether a partnership firm can be considered a shareholder under Section 2(22)(e).3. The applicability of the term 'beneficial owner' in the context of deemed dividends.Detailed Analysis:Interpretation of Section 2(22)(e) of the Income Tax Act, 1961:The primary issue in the appeals was the interpretation of Section 2(22)(e) of the Income Tax Act, 1961, specifically post the 1988 amendment. The section pertains to the treatment of certain payments by companies as deemed dividends. The court examined the historical context and amendments to the provision to understand its current application. The original definition under the Income Tax Act, 1922, and its judicial interpretation in cases like C.I.T., Andhra Pradesh vs. C.P. Sarathy Mudaliar (1972) and M/s Rameshwari Lal Sanwarmal vs. Commissioner of Income Tax, Assam (1980) were discussed. The court noted that the term 'shareholder' traditionally referred to a registered shareholder in the company's books.Whether a Partnership Firm Can Be Considered a Shareholder:The court addressed whether a partnership firm, which had taken a loan from a company, could be considered a shareholder under the amended Section 2(22)(e). The Assessee firm had taken a loan from M/s Jetair Private Limited, and the shares were held by two partners on behalf of the firm. The court examined whether the firm could be treated as a shareholder, given that the shares were registered in the names of the individual partners. The court concluded that a partnership firm could not be considered a registered shareholder, aligning with the precedent that only individuals registered in the company's books could be shareholders.Applicability of the Term 'Beneficial Owner':The court scrutinized the term 'beneficial owner' introduced in the 1988 amendment. The amendment aimed to prevent closely held companies from avoiding tax by distributing profits as loans or advances instead of dividends. The court analyzed the legislative intent and the explanatory memorandum accompanying the amendment, which clarified that the provision targets loans or advances to shareholders holding not less than 10% of the voting power or to concerns where such shareholders have substantial interest. The court concluded that the term 'shareholder' in both limbs of the amended definition refers to the beneficial owner of shares, not necessarily a registered shareholder. This interpretation aligned with the legislative intent to tax deemed dividends effectively.Judicial Precedents and Conflicting Judgments:The court noted conflicting judgments, particularly the Division Bench judgment in C.I.T. vs. Ankitech Private Limited, which held that the term 'shareholder' continued to mean a registered shareholder even after the amendment. The court found this interpretation inconsistent with the legislative intent and the literal language of the amended provision. The court emphasized that the beneficial owner, holding not less than 10% of the voting power, should be considered for the application of Section 2(22)(e).Conclusion and Referral to Larger Bench:Given the conflicting interpretations and the significant implications of the amended provision, the court decided that the matter required reconsideration by a larger bench. The court referred the appeals to the Chief Justice of India to constitute a bench of three judges to re-examine the entire question, including the applicability of the term 'beneficial owner' and whether the facts of the present case fit the second limb of the amended definition clause.Ordered Accordingly:The appeals were placed before the Chief Justice of India for the constitution of an appropriate bench to re-evaluate the issues comprehensively.