TaxTMI 
TaxTMI 
2016 (3) TMI 630
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....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 (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965; (ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of mone....
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.... power." 3. The provisions of Sec.2(22)(e) treats "loan or advance" given by a company in which public are not substantially interest as distribution of dividend by the company to its shareholders and chargeable to tax. It is being done to bring within the tax net monies paid by the closely held companies to their shareholders who have substantial interest in the company, payment by way of loan or advance presuming that the accumulated profits which the company has are being given as loan or advance instead of dividend to avoid tax if such sums are given as Dividend. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholder in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholder, money in the form of an advance or loan.. Nomenclature of this section which is "Deemed Dividend", connotes that this section has been brought on statue as "Deeming Fiction". It means that the income termed as dividend is actually not dividend distributed by a closely held company but the amount paid is still treated as divide....
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....e AO were satisfied viz., that the Assessee was a person holding not less than ten per cent of the voting power of PIPL. 9. Before CIT(A) the Assessee pointed out that it had no liability to pay Advance tax and therefore there was no reason why PIPL should pay advance tax of Rs. 9 lacs on behalf of the Assessee to the credit of the Central Government towards tax liability. There was no flow of funds in favour of the Assessee in the sense that the money paid in RBI remained with the Tax department and did not reach the Assessee. For a transaction of "loan or advance", the recipient of the loan or advance should have the benefit of use of the sum given as loan or advance and since the money in question was never available for use by the Assessee, it could not be said that there was any " loan or advance" by PIPL to the Assessee and therefore the deeming provisions of Sec.2(22) ( e) of the Act are not attracted. It was also contended that the Assessee partnership firm was not a shareholder in PIPL and the shareholders in their individual capacity were shareholders in PIPL. It was argued that since the Assessee is not a shareholder the deeming provisions of Sec.2(22)( e) of the Act ....
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....e of the Assessee would be covered by the provisions of Sec.2(22)( e) of the Act and would within the clause "Loan or Advance" by a company "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)". In this regard, the CIT(A) held that the same set of persons held shares in PIPL and were also partners in the Assessee firm and therefore it was a case where loan or advance was given by PIIPL to a concern (the Assessee) in which its shareholders or partners had substantial interest. Thus the case of the Assessee be covered by the provisions of Sec.2(22) ( e) of the Act. The CIT(A) thereafter held as follows: "Thus, in my view it is beyond the scope of this appeal to decide on the issue whether the provisions of section 2(22)(e) are applicable in the case of a firm only for the reason that substantial shareholders in the assessee firm also hold substantial stake in the company which made the loan or advance to the assessee firm. The facts regarding the substantial interest of the common partners/shareholders in the company which advanced the sum of Rs. 9 lakhs (PIPL)....
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.... of the CIT(A), the Assessee is in appeal before the Tribunal. I have heard the submissions of the learned counsel for the Assessee who reiterated the stand of the Assessee as put forth before the CIT(A). The learned DR relied on the order of the CIT(A) and further submitted that the fact that the sum of Rs. 9 lacs paid as advance tax in the name of the Assessee and that it had never been refunded to the Assessee so far is not borne of the records and such a plea was not taken before the lower authorities. 12. I have given a very careful consideration to the rival submissions. In my view there is no reason whatsoever to doubt the plea put forth by the Assessee that the sum of Rs. 9 lacs was mistaken paid to RBI in the name of the Assessee instead of PIPL. The reason being that the returned income of the Assessee for the relevant AY was only Rs. 4,26,150/-. The Assessee would get credit of TDS of Rs. 70,480 which was allowed by the AO in the order of assessment. It thus becomes clear that there could not be advance tax liability to the extent of Rs. 9 lacs for the Assessee. The contention of the Assessee therefore that the sum in question was mistaken paid to RBI in the name of A....
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.... (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.2(22)(e) viz., a registered and a beneficial holder of shares holding 10% voting power. (c)The very same person referred to in (b) above must also be a member or a partner in the concern holding substantial interest in the concern viz., when the concern is not a company, he must at any time during the previous year, be beneficially entitled to not less than twenty percent of the income of such concern; and where the concern is a company he must be the 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 percent of the voting power (d) If the above conditions are satisfied then the payment by the company to the c....
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....as 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 consideration:- "Whether on the facts and in the circumstances of the case and in law the learned Tribunal was justified in upholding the order of learned CIT(A) deleting the addition of Rs. 10 lacs as deemed dividend under Section 2(22)(e) of the IT Act? " The Hon'ble Court held as follows:- " The important aspect, being the requirement of section 2(22)(e) is, that 'the payment may be made to any concern, in which such shareholder is a member, or the partner, and in which he has substantial interest, or any payment by any such company, on behalf or for the individual benefit of any such shareholder ....... " Thus, the substance of the requirement is that the payment should be made on behalf of or for the individual benefit of any such ....
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....mbers, 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 individual benefit of such shareholder. In such an event, by the deeming provisions such 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 it's 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 Sec.2(22)(e) of the Act by the Finance....