TaxTMI 
TaxTMI 
2009 (3) TMI 633
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....tion of Rs. 95,78,000 made by the Assessing Officer, but deleted by the ld. CIT(A), on account of loan treated as deemed dividend under section 2(22)(e) of the Income-tax Act. 5. In the assessment year 2003-04, it was observed by the Assessing Officer that the assessee, a partnership firm, consisting of three partners, namely, Shri Naresh Goyal having 35 per cent profit sharing ratio, Shri Surender Goyal having 15 per cent profit sharing ratio and M/s. Jet Enterprises Pvt. Ltd. having 50 per cent profit sharing ratio, is engaged in the business as general sales agent for passenger sales and cargo for M/s. Kuwait Average Corporation and American Airlines in India. On perusal of the audit report of the accounts, it was noticed by the Assessing Officer that the assessee had procured or taken a loan totalling to Rs. 28,52,41,516 from M/s. Jetair Pvt. Ltd., Jetair House, 13 Community Centre, Yusuf Sarai, New Delhi, during the year under consideration. The Assessing Officer required the assessee to furnish the details of shareholding of the assessee-firm or its partners in M/s. Jetair Pvt. Ltd. The following details were submitted by the assessee:- S.No. Name of the partner N....
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....s in the form of annual return of M/s. Jetair Pvt. Ltd., it was noticed by the Assessing Officer that out of the total issued share capital of 2,98,800 numbers of shares, the assessee firm M/s. National Travel Services held 1,43,988 equity shares of M/s. Jetair Pvt. Ltd. through its partners, Shri Naresh Goyal and Shri Surender Goyal. The Assessing Officer observed that the assessee-firm had taken loan of Rs. 28,51,41,516 from M/s. Jetair Pvt. Ltd., and the assessee-firm had 1,43,988 equity shares of Rs. 100 each of M/s. Jetair Pvt. Ltd. These shares were purchased through the partners of the assessee-firm, namely, Shri Naresh Goyal and Shri Surender Goyal. The Assessing Officer, therefore, had taken a view that assessee-firm was the beneficial owner with shareholding of 48.18 per cent of the voting power in M/s. Jetair Pvt. Ltd., and since the assessee-firm was the beneficial owner of shareholding of more than 10 per cent of the voting power in M/s. Jetair Pvt. Ltd., the provisions of section 2(22)(e) are attracted in the present case. The Assessing Officer, therefore, asked the assessee-firm to show-cause as to why loan of Rs. 28,51,41,516 taken by the assessee-firm from M/s. Jet....
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....s not a shareholder as per law and, therefore, the loan received by it from the company M/s. Jetair Pvt. Ltd. cannot be treated as deemed dividend within the meaning of section 2(22)(e) of the Act. 11. Being aggrieved with the ld. CIT(A)'s order, the department has filed the present appeal before the Tribunal. 12. We have heard both the parties and have carefully gone through the orders of the authorities below. We have perused the material on record. 13. In the course of hearing of this appeal, the ld. counsel for the assessee has submitted that the scope and meaning of section 2(22)(e) has recently been considered by the Special Bench of the Hon'ble ITAT, Mumbai Bench in the case of Asstt. CIT v. Bhaumik Colour (P.) Ltd. [2009] 27 SOT 270. He further submitted that the issue involved in the present case is fully covered by the said decision of the Special Bench. 14. The ld. D.R., on the other hand, supported the Assessing Officer's order and contended that Shri Naresh Goyal and Shri Surender Goyal, partners of the assessee-firm, were holding shares of M/s. Jetair Pvt. Ltd. on behalf of the firm and not in their individual capacity, and as such the assessee-firm is to ....
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....nd not in the hands of concern. 17. Now, the first question that falls for our consideration is to decide as to whether the present assessee partnership firm can be said to be a registered shareholder of M/s. Jetair Pvt. Ltd. On the facts placed on record, we find that M/s. Naresh Goyal and Shri Surender Goyal are the shareholders to the extent of 1,33,180 numbers of shares and 10,800 number of shares respectively. It is not in dispute that they have become shareholder of M/s. Jetair Ltd. representing the present assessee firm i.e., M/s. National Travels Services. The expression "shareholder" used in section 2(22)(e) has been considered and interpreted by the Special Bench of the ITAT, Mumbai Bench 'E' in the case of Bhaumik Colour (P.) Ltd. (supra), where the Special Bench of the Tribunal has thus, observed and held as under:- "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 Indian Income-tax Act, 1922 as introduced by the Finance Act, 1955 corresponding to section 2(22)(e) of the Income-tax Act, 1961 was as follows : "Any payment by a company, not being a company in which the publi....
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....erest in a concern, other than a company, if he is, at any time during 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 payment 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 payment 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 intr....
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....nymous to section 2(22)(e) of the Income-tax Act, 1961 came up for consideration. 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 1922 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 (supra). In this case, the company advanced the loans to the assessee Hindu undivided family who was the beneficial owners of the shares in the company, but the shares were registered in the name of the i....
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....der" found in the 1961 Act has to be, therefore, construed as applying only to registered shareholder. It is a principle of 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 with effect from 1-4-1988 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....
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.... the above facts, the Hon'ble Supreme Court held that the Hindu undivided family being only the beneficial shareholder and not a registered shareholder would not fall within the purview of section 2(6A)(e) of the 1922 Act, this position is applicable in the 1961 Act also as so observed by the Special Bench of the Tribunal. 20. In the light of the discussions made above and the view taken by the Special Bench, we, therefore, hold that the present partnership firm, for on whose behalf the partners have become the shareholder in a company, which has given the loan to the partnership firm, cannot be said to be a registered shareholder for the purpose of section 2(22)(e) of the Act. 21. The Special Bench of the Tribunal has also considered and examined the new category of payment which was considered as dividend as introduced by the Finance Act, 1987, with effect from 1-4-1988 and has decided the issue as under:- "25. The new category of payment which was considered as dividend introduced by the Finance Act, 1987 with effect from 1-4-1988 by the second limb of section 2(22)(e) is payment "to any concern in which such shareholder is a member or a partner and in which he has a su....
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.... be dividend. 27. In the case of the assessee it is seen that conditions (b) and (c) are not satisfied inasmuch as NNT held shares in UPPL and BCPL only as a legal and registered owner but not as a beneficial owner. In the case of the assessee it is seen that the three trustees of NNT held shares in UPPL and BCPL only as a legal and registered owner. They held shares for and on behalf of 5 beneficiaries of the trust who are different individuals. They were, therefore, not beneficial owners of the shares. Trust ownership is a peculiar instance of duplicate ownership. Trust property is, in fact, owned by two persons simultaneously in the sense that one is under an obligation to use the property for the benefit of the other. The ownership of the trustee called trust ownership is nominal rather than real. The beneficiary interest is called the beneficial interest. The Trustee is to administer the property of another person but the ownership right in the trustee is to be used only on behalf of the real owner. As between trustee and third party ownership conferred on the trustee fictitiously by law prevails, that is, the trustee is clothed with the rights of the beneficiary and is so ....
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....". We have already seen the divergent views on this issue which have been referred to in the earlier part of this order. 31. The above provisions were subject-matter of consideration before the Hon'ble Rajasthan High Court in the case of Hotel Hill Top (supra). The facts of the case before the Hon'ble Court were as follows : The assessee was one M/s. Hotel Hill Top a partnership firm. This firm received an advance of Rs. 10 lakhs from a company M/s. Hill Top Palace Hotels (P.) Ltd. The shareholding pattern of M/s. Hill Top Palace Hotels (P.) Ltd., was as follows: 1. Shri Roop Kumar Khurana : 23.33% 2. Smt. Saroj Khurana : 4.67% 3. Vikas Khurana : 22% 4. Deshbandhu Khurana : 25% 5. Shri Rajiv Khurana : 25% The constitution of the firm Hotel Hill Top was as follows : 1. Shri Roop Kumar Khurana : 45% 2. Shri Deshbandhu Khurana : 55% The Assessing Officer assessed the sum of Rs. 10 lakhs as deemed dividend under section 2(22)(e) of the Act in the hands of the firm because the two partners of M/s. Hotel Hil....
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.... whose behalf or on whose individual benefit, being such shareholder, the amount is paid by the company to the concern. Thus, the significant requirement of section 2(22)(e) is not shown to exist. The liability of tax, as deemed dividend, could be attracted in the hands of the individuals, being the shareholders, and not in the hands of the firm." 32. The aforesaid decision of the Hon'ble Rajasthan High Court which is the only decision of High Court, should be sufficient to answer question No. 2 which has been referred to the Special Bench by holding that 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. The argument of the learned D.R. that the Hon'ble Rajasthan High Court did not deal with the second limb of section 2(22)(e) of the Act is not correct. 33. We may also touch upon certain other aspects of the issue in the light of the submissions made before us. The Tribunal in the case of Nikko Technologies (I) (P.) Ltd. (supra), while holding that the payment made by a company even to a non-shareholder can be brought to tax in the hands of the non-shareholder ha....
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....payment by the company is treated as dividend. 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. The intention of the Legislature is, therefore, to tax dividend only in the hands of the shareholder and not in the hands of the concern. 36. The basis of bringing in the amendment to section 2(22)(e) of the Act by the Finance Act, 1987 with effect from 1-4-1988 is to ensure that persons who control the affairs of a company as well as that of a firm can have the payment made to a concern from the company and the person who can control the affairs of the concern can draw the same from the concern instead of the company directly making payment to the shareholder as dividend. The source of power to control the affairs of the company and the concern is the basis on which these provisions have been made. It is, therefore, proper to construe t....
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....he company (b) paid to its shareholders. Section 2(22) of the Act artificially extends the scope of dividend from being more than only a distribution of profits to cover certain other types disbursements such as loans paid etc. (the first ingredient mentioned above). It does not, however, alter the second component of its natural meaning viz., paid to its shareholder. In other words all that section 2(22) seeks to do is to expand the various types payments that may be regarded as dividend. The Apex Court while considering what can come within the artificial definition of dividend under section 2(22) in the case of CIT v. Nalin Beharilall Singha [1964] 74 ITR 849 (SC), described the scope of the definition of dividend thus- "The definition is, it is true, an inclusive definition and a receipt by a shareholder which does not fall within the definition may possibly regarded as dividend within the meaning of the Act unless the context negatives that view." The contention of the D.R. that provisions of section 8(a) of the Act creates a fiction by which even payments to non-shareholders can be construed as dividend cannot be accepted. Those provisions merely fix the year in which d....
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.... shareholder than 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." 22. From the said decision of Special Bench, it is, thus, clear that even in the light of the amendment introduced by the Finance Act, 1987 with effect from 1988, the deemed dividend within the meaning of section 2(22)(e) cannot be assessed in the hands of the concern but it is to be assessed in the hands of the registered shareholder. In para 36 of the judgment, the Special Bench has taken a view that the deeming fiction brought by the Finance Act, 1987 with effect from 1-4-1988 can be applied only in the hands of the shareholder and not the non-shareholder, namely, the concern, to which the loan or advance has been granted by the company in which the partner or member of the concern are holding the shares as registered shareholder. 23. In the present case, Shri Naresh Goyal, Shri Surender Goyal and Jet Enterprises Pvt. Ltd. are the registered shareholders of M/s. Jetair Pvt. Ltd. They are the partners in the present assessee partnership firm having share in profit....