TaxTMI 
TaxTMI 
2011 (7) TMI 288
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.... not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being 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) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; but "dividend" does not include- (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ; (ia) a distribution made in accordance with sub-clause (c) or sub-clause ....
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....h the public are substantially interest, of any sum (whether as representing a part of the assets of the company or otherwise) made after 31.05.19987 by way of advance or loan. First limb (a) to a shareholder, being 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) holding not less than ten percent of the voting power, Second limb (b) or to my concern in which, such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) Third limb (c) or any payment by any such company on behalf, or for the individual benefit, or any such shareholder, to the extent to which the company in either case possesses accumulated profits." 4. In Ankitech (supra), this Court was concerned with the second limb and the question that arose was: when the payment is made to "a concern" in which such share holder is a member or partner and he has a substantial interest, whether deemed dividend income would be treated as income in the hands of such concern or in the ....
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.... Act as projected by the learned counsels for the Revenue on the basis of Sections 4, 5, 8, 14 and 56 of the Act would be of no avail. Simple answer to this argument is that such loan or advance, in the first place, is not an income. Such a loan or advance has to be returned by the recipient to the company, which has given the loan or advance. 27. Precisely, for this very reason, the Courts have held that if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend under Section 2(22)(e) of the Act." 5. We may also point out that while coming to this conclusion, this Court concurred with the same view expressed by the Bombay High Court in Commissioner of Income Tax v. Universal Medicate (P) Ltd. 190 Taxman 144 (Bom.) which had approved the decision of the Special Bench Mumbai in the case of ACIT v. Bhaumik Colour (P) Ltd. 118 ITD 1 (Mum.) (SB) and Rajasthan High Court in the case of Commissioner of Income Tax v. Hotel Hilltop 217 CTR (Raj.) 527. 6. Though, in these appeals also we are concerned with the provisions of Section 2(22)(e) of the Act, another facet of this provision has arisen for consid....
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....ourt has concurred with the said opinions. On this basis, it was pointed out that following observations of the Special Bench Mumbai in para 24 squarely answered the question posed in these appeals which is reproduced in Ankitech (supra) also. This para reads as under:- "24. 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." 10. No doubt, Ankitech (supra) affirmed the view taken by the Special Bench in Bhaumik Colour (supra). However, the entire judgment in Ankitech (supra) is confined to second limb of Section 2(22)(e) of the Act and it is that aspect only, as highlighted above as well, which was the focus of attention and answered. No doubt, in the aforesaid para of Bhaumik Colour (supra) Special Tribunal has commented upon the first limb of Section ....
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....all the members of the partnership firm should be entered in the Register of Members in order that the right of the partnership as a whole to the shares in question may prevail. The holding of shares by only one or more partners on behalf of other partners of a firm should not, therefore, ordinarily arise. However, where in a given case, the name or names, of only one or some of the partners is entered in the Register of Members while the intention is that the partnership as a whole should have the right of membership in respect of the shares in question, it is obviously necessary for such partners who hold shares not only for respect of the shares in question, it is obviously necessary for such partners who hold shares not only for themselves but for the benefit of all partners constituting the firm whose names are not entered in the Register of Members, to comply with the rules under Section 187C." 12. Sub Section (2) and (7) of Section 187-C of the Companies Act are reproduced as under:- "S.187-C. Declaration by persons not holding beneficial interest in any share (1) ................. (2) Notwithstanding anything contained elsewhere in this Act, a ....
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....also relied upon the judgment of Allahabad High Court in the case of Commissioner of Income-Tax v. Raj Kumar Singh & Co. 295 ITR 9 (All) wherein the Court held that the conditions stipulated in Clause (e) of Section 2(22) of the Act were not satisfied where the assessee firm was not the shareholder of a company which gave the loan and the partners of the firm were shareholders in the books company. This judgment was rendered following Supreme Court judgment in the case of Commissioner of Income Tax v. C.P. Sarathy Mudaliar, 83 ITR 170 (SC). Following observation from the said judgment was quoted by the Allahabad High Court wherein the Supreme Court has held that only loan advanced to shareholder could be deemed to be dividends under Section 2(6A)(e) of the Old Act (corresponding to section 2(22)(e) of the present Act):- "What Section 2(6A)(e) is designed to strike at is advance or loan to a "shareholder" and the word "shareholder" can mean only a registered shareholder. It is difficult to see how a beneficial owner of shares whose name does not appear in the register of shareholders of the company can be said to be a "shareholder". He may be beneficially entitled to the sh....
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.... therefore, entitled to have this dividend income grossed up under Section 16(2) of the Act by the addition of the Income Tax paid by the company in respect of those shares, and claim credit for the tax deducted at source, under Section 18(5) of the Act. The Apex Court held as follows: "The word "holder of a share" are really equal to the word "shareholder", and the expression " holder of a share" denotes, in so far as the company is concerned, only a person who, as a shareholder, has his name entered on the register of members. The position, therefore, under the Indian Companies Act, 1913, is quite clear that the expression "shareholder" or "holder of a share" in so far as that Act is concerned, denotes no other person except a "member".... The question that falls for consideration is whether the meaning given to the expression "shareholder" used in Section 18(5) of the Act by these cases is correct. No valid reason exists why "shareholder" as used in Section 18(5) should mean a person other than the one denoted by the same expression in the Indian Companies Act, 1913. In Wala Wynaad Indian Gold Mining Company., In re [1982] 21 Ch.D. 849, 854 Chitty, J.,....
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....s. However, for all intent and purposes it is a partnership firm which would be the shareholder as well for the purposes of Section 2(22)(e) of the Act. Otherwise, argued the learned senior Counsel, the very purpose of this provision would be defeated in the case of a partnership firm, as in no case shares would be bought in the name of partnership firm since it is not permissible in law. She further submitted that one does not have to resort to the provision of the Companies Act to find out who is the shareholder. She also submitted that the Supreme Court judgment in Mudaliar (supra) was rendered before the amendment to Section 2(22)(e) of the Act. She also argued that there is a difference between the HUF and the partnership firm which is eloquently brought out by the CIT(A) in his order passed in ITA 1204/2010. 17. We have given our thoughtful consideration to the submission of the counsel for both the parties. According to us the outcome of this appeal depends on the following two questions:- (1) To attract the first limb of Section 2 (22)(e) of the Act, is it necessary that the person who has received the advance or loan is a shareholder and also beneficial owner. ....
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....that shares would be purchased by the firm in the name of its partners as the firm is not having any separate entity of its own. With the name of the partner entering into the register of members of the company as shareholder, the said partner shall be the 'shareholder' in the records of the company but not the beneficial owner as 'beneficial owner' is the partnership firm. This would mean that the loan or advance given by the company would never be treated as deemed dividend either in the hands of the partners or in the hands of partnership firm. In this way the very purpose for which this provision was enacted would get defeated. The object behind this provision is succinctly stated in the Circular No. 495 of 22nd September, 1987 particularly in the Explanatory Notes to Finance Act, 1987 when this provision was amended. It reads as under:- "With the deletion of Section 104 to 109 there was a likelihood of closely held companies not distributing their profits to shareholders by way of dividends but by way of loans or advances to that these are not taxed in the hands of the shareholders. The forestall this manipulation, sub-clause (3) of clause (22) of Sect....
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....ure or even "do some violence" to it, so as to achieve obvious intention of the Legislature. Reference is made to the decision of the Supreme Court in the Case of K.P. Varghese v. ITO 131 ITR 597 (SC). 21. No doubt, when Section 2 (22) (e) of the Act enacts a deeming provision, it has to be strictly construed. At the same time, it is also trite that such a deeming provision has to be taken to its logical conclusion. If the partnership firm which has purchased the shares is not treated as shareholder merely because the shares were purchased in the name of the partners, that too because of the legal compulsion that shares could not be allotted to the said partnership firm which is a non legal entity, it would be impossible for such a condition to be fulfilled. That is not the purpose of law. The partnership firm is synonym of the partners. As per the Circular issued by the SEBI dated 13th March, 1975 interpreting Section 187(c) of the Companies Act, relied by the learned counsel for the assessee himself, a partnership firm is not a person capable of being a 'member' within the meaning of Section 47 of the Companies Act. It is further explained that since a partnership firm....