Tax Court rules on dividend taxation for foreign shareholder under Income Tax Act

The High Court upheld the ITAT's decision that a sum deemed as dividend under Section 2(22)(e) of the Income Tax Act, 1961 should be taxable in the hands of the shareholder, M/s. Verizon Asia Pacific Holdings Pvt. Ltd., Singapore, and not the Assessee. The Court emphasized the need for a broader interpretation of the term 'shareholder,' ruling that the tax liability falls on the beneficial shareholder holding more than 10% of voting power. The appeal was dismissed as the borrowed amount was deemed taxable in the hands of Verizon Singapore, not the Assessee.

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Issues:
- Appeal against ITAT order on taxability of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
- Interpretation of the term 'shareholder' in light of the decision in Ankitech Pvt. Ltd. case and subsequent doubts raised by the Supreme Court in National Travel Services case.

Analysis:
1. The appeal was filed by the Revenue challenging the ITAT's decision regarding the taxability of a sum as 'deemed dividend' under Section 2(22)(e) of the Income Tax Act, 1961 for the Assessment Year 2008-09. The ITAT held that the amount in question should be taxable in the hands of M/s. Verizon Asia Pacific Holdings Pvt. Ltd., Singapore, and not in the hands of the Assessee. This decision was based on the interpretation of the term 'shareholder' as discussed in previous judgments.

2. The Division Bench of the High Court had earlier ruled in Commissioner of Income Tax v. Ankitech Pvt. Ltd. that the lender holding shares of the borrower should be liable to pay tax on 'deemed dividend' and not the borrower itself. This decision was upheld by the Supreme Court in CIT v. Madhur Housing and Developing Company. However, doubts were raised by the Supreme Court in National Travel Services case regarding whether the term 'shareholder' should include a beneficial owner of shares.

3. The Supreme Court in National Travel Services case expressed concerns about the interpretation of the term 'shareholder' and the necessity of being a registered shareholder or a beneficial owner. The Court emphasized that the amended provision aimed to include beneficial owners holding not less than 10% of voting power. This led to a reevaluation of the Ankitech Pvt. Ltd. judgment and the need for a broader interpretation of the term 'shareholder.'

4. The High Court, in the present case, found that the ITAT's decision was in line with the legal principles established in Ankitech Pvt. Ltd. and Madhur Housing cases. The Assessee, being a borrower from VCIPL, could not be held liable for tax on the deemed dividend borrowed from Verizon Singapore, which held more than 10% of voting power in both VCIPL and the Assessee. The Court reiterated that the tax liability, if any, should fall on Verizon Singapore as the beneficial shareholder.

5. The Revenue argued that the Assessee should be considered a 'beneficial shareholder' due to the shareholding pattern with Verizon Singapore. However, a thorough analysis of Section 2(22)(e) of the Act led the Court to conclude that the borrowed amount could only be taxed as deemed dividend in the hands of Verizon Singapore and not the Assessee. Consequently, the appeal was dismissed as no substantial question of law arose in this matter.

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