2016 (2) TMI 703

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....aid up share capital in the share capital of Assessee as well as JAFL and therefore the provisions of Sec.2(22)( e) of the Act would be attracted. The CIT ultimately passed an order holding that the AO before concluding the Assessment ought to have made enquiries on this aspect and that he failed to make any enquiry. Accordingly, the CIT passed order u/s.263 of the Act setting aside the order of the AO and directing the AO to conduct necessary examination to consider the applicability of Sec.2(22)( e) of the Act. 4. Aggrieved by the order of the CIT the Assessee has preferred the present appeal before the Tribunal. 5. None was present on behalf of the Department. Mr.Vivek Verma JCIT, Sr.DR, present submitted that the case is not allotted to him and expressed his inability to inform the bench as to why the revenue is not being represented in this appeal. Since appeals under Sec.263 of the Act are to be disposed on a priority basis, we deem it expedient to proceed to hear the appeal after hearing the submissions of the learned counsel for the Assessee. 6. We have heard the submissions of the learned counsel for the Assessee. The provisions of Sec.2(22)(e) of the Act, reads a....

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.... 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, of any such shareholder, to the extent to which the company in either case possesses accumulated profits." 6.3. In the present appeal we are concerned with the second limb of Sec.2(22)(e) of the Act, viz., "to any concern in which such shareholder is a member or a partner and in which he has a substantial interest". The following conditions are required to be satisfied for application of the above category of payment to be regarded as Dividend. They are:- (a) There must be a payment to a concern by a company. (b) A person must be Shareholder of the company being a registered holder and 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. This is because of the expression "Such Shareholder" found in the relevant provision. This expression only refers to the shareholder referred to in the earlier part of Sec.....

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....ar 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 AO assessed the sum of Rs. 10 lacs as deemed dividend u/s.2(22)(e) of the Act in the hands of the firm because the two partners of M/S.Hotel Hill Top were holding shares by which they had 10% voting power in M/S.Hill Top Palace Hotels (P) Ltd. They were also entitled to 20% of the income of the firm M/S.Hotel Hill Top. Therefore the loan by M/S.Hill Top Palace Hotels (P) Ltd. To the firm M/S.Hotel Hill Top was treated as deemed dividend in the hands of M/S.Hotel Hill Top, the firm under the Second limb of Sec.2(22)(e) of the Act. The CIT(A) held that since the firm was not the shareholder of the company the assessment as deemed dividend in the hands of the firm was not correct. The order of the CIT(A) was confirmed by the Tribunal. On Revenue's appeal before the Hon'ble High Court, the following question of law was framed for consideratio....

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....n a shareholder. The argument of the learned D.R. that the Hon'ble Rajasthan High Court did not deal with the second limb of Sec.2(22)(e) of the Act is not correct." 6.5. The Special Bench further held as follows:- "34. We are of the view that the provisions of Sec.2(22)(e) does not spell out as to whether the income has to be taxed in the hands of the shareholder or the concern(non-shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of Sec.2(22)(e) of the Act. 35. The intention behind enacting provisions of section 2(22)(e) are that closely held companies (i.e. companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would became taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individ....