AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (8) TMI 408
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....A of the Act was issued to the assessee and the assessment was completed u/s 143(3) r.w.s. 153A of the Act. During the assessment proceedings, the assessing officer found that the assessee company is a closely held company with authorized capital of Rs. 1,50,000/- with two major shareholders as under: Sri A. Krishna Chaitanya 50% 7500 shares Smt. V. Radha Madhavi 50% 7500 shares 2.1 Sri A. Krishna Chaitanya is one of the major share holder of M/s. Maha Maruthi Logistics Private Limited with 23% of shares and M/s. Maha Maruthi Logistics Private Limited is a closely held company in which public are not substantially interested. For the assessment year 2009-10, the company is having accumulated profits to the extent of Rs. 4,82,35,110/-. M/s. Maha Maruthi Logistics Private Limited paid an amount of Rs. 45 lakhs on 7.10.2009 through RTGS to the assessee. As on 1.4.2008, an amount of Rs. 2,16,307/- was receivable from M/s. Maha Maruthi Logistics Private Limited and with the payment of Rs. 45 lakhs, the net balance received by the assessee company was Rs. 42,82,693/-. Since the shareholders of the assessee company are having substantial share holding exceeding 20% in M/s. Maha Marut....
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.... notice issued u/s 153A of the Act is valid and accordingly, assessment was made validly u/s 143(3) r.w.s. 153A of the Act. 5. The assessee is a private limited company in which public are not substantially interested. M/s. Maha Maruthi Logistics Private Limited has given a loan of Rs. 45 lakhs to the assessee company. The assessing officer treated the amount of loan given to the assessee company as a deemed dividend u/s 2(22)(e) of the Act. The assessee company is not a shareholder in the M/s. Maha Maruthi Logistics Private Limited. The Directors of the assessee company are having substantial share in M/s. Maha Maruthi Logistics Private Limited, which has given a loan to the assessee company. Now the issue for consideration before us is whether the payment made to assessee company which is not a shareholder in the payer company is deemed dividend or not. We have gone through the provisions of section 2(22)(e) of the Act carefully and extract the relevant provisions of section 2(22)(e) of the Act, which reads as under: "Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the c....
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.... 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 substant ial 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 prof its. 23. It is rightly pointed out by the Bombay High Court in Universal Medicare (P) Ltd.(supra)that Section 2(22)(e) of the Act is not artistically worded. Be as it may, we may reiterate that as per this provision, the following conditions are to be satisfied: (1) The payer company must be a closely held company. (2) It applies to any sum paid by way of loan or advance during the year to the following persons: (a) A shareholder holding at least 10 of voting power in the payer company. (b) A company in which such shareholder has at least 20% of the vot ing power. (c) A concern (other than company) in which such shareholder has at least 20% interest. (3) The payer company has accumulated profits on the date of any such payment and the payment is out of accumula....
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....rn (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of "deeming shareholder", then the Legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the Revenue would stand answered, once we look into the matter from this perspect ive. 26. In a case like this, the recipient would be a shareholder by way of deeming provision. It is not correct on the part of the Revenue to argue that if this posit ion is taken, then the income "is not taxed at the hands of the recipient". Such an argument based on the scheme of the 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, wh....
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....held as under: "5. It can be seen from the circular that the provisions of amended section 2(22)(e) are to be applied only to the payments made to the shareholders and not to any other person or concern other than the shareholders. The Allahabad High Court in the case of CIT vs. H. K. Mittal reported in 219 ITR 420 held that the chief ingredient of dividend as defined in sub clause (e) of clause (22) of section 2 of the I T Act is that the recipient should a shareholder on the day the loan was advanced. If that fact is not established, there cannot be a deemed dividend. Therefore, the provisions of sec. 2(22)(e) cannot be applied to MARC as it is not a shareholder in MTAR Technologies Pvt. Ltd. (Hereinafter called as MTAR). In this regard, the assessee relies on the decision of the ITAT Mumbai Bench "G" in the case of Seamist Properties Pvt. Ltd. vs. ITO reported in (2005) 1 SOT page 142. The assessee further submits that the provisions of sec. 2(22)( e) mention as under: "Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as represent ing a part of the assets of the company or otherwise) (made after the 31st day ....
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.... 1980 Raj 252, while dealing with an expression "no such application" in the context of r. 97 of the Rajasthan High Court Rules, 1952 has held as follows : "Generally the word 'such' refers only to previously indicated, characterized or specified. 'Such' is an adjective meaning, the one previously indicated or refers only to something which has been said before." The Hon'ble Allahabad High Court in the case of Mohan Lal & Anr. vs. Grain Chambers Ltd. AIR 1959 All 279 has held as follows : "In fact, it appears to us that the word 'such' is used before a noun in a latter part of a sentence, the proper construction in the English language is to hold that the same noun is being used after the word 'such' with all its characteristics which might have been indicated earlier in the same sentence." (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 per cent of the income of such concern; and where the concern is a company he must be the owner of shares, n....
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....d to in s. 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of s. 2(22)(e) will not apply. Similarly, if a person is a beneficial shareholder but not a registered shareholder then also the provisions of s. 2(22)(e) will not apply. 29. In view of the fact that the assessee was not holding beneficial interest in shares of BPCL and UPPL, there is no requirement of answering the first question that arises for consideration in the case of the assessee viz., as to whether deemed dividend under s. 2(22)(e) of the IT Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender ? However, in the case of the intervener viz., Asstt. CIT vs. Weaveland, ITA No. 5036/Del/2008 (supra) this question needs to be answered. The facts in the case of the intervener have already been narrated earlier and are not being repeated here. 30. At the outset it has to be mentioned that provisions of s. 2(22)(e) which brought in a new category of payment which was to be considered as dividend as introduced by the Finance Act, 1987 w.e.f 1st April, 1988 viz.....
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....ich 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 shareholder. Obviously, the provision is intended to attract the liability of tax on the person, on whose behalf, or for whose individual benefit, the amount is paid by the company, whether to the shareholder, or to the concerned firm. In which event, it would fall within the expression 'deemed dividend'. Obviously, income from dividend is taxable as income from the other sources under s. 56, and in the very nature of things the income has to be of the person earning the income. The assessee in the present case is not shown to be one of the persons; being shareholder. Of course, the two individuals being R and D, are the common persons, holding more than requisite amount of shareholding and are having requisite interest, in the firms, but then, thereby the deemed dividend would not be deemed dividend in the hands of the firm, rather it would obviously be dee....
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....rcular No. 495, dt. 22nd Sept., 1987 of the CBDT wherein it has been opined that deemed dividend would be taxed in the hands of a concern (non-shareholder) also if the conditions mentioned in the section are satisfied. 34. We are of the view that the provisions of s. 2(22)(e) do 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 s. 2(22)(e) of the Act. 35. The intention behind enacting provisions of s. 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 become 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....
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....ances to a shareholder or to a concern in which a shareholder is substantially interested deeming them as dividend in the hands of a shareholder the ordinary and natural meaning of the word "dividend" is altered. To this extent the definition of the term "dividend" can be said to operate. If the definition of "dividend" is extended to a loan or advance to a non-shareholder, the ordinary and natural meaning of the word "dividend" is taken away. In the light of the intention behind the provisions of s. 2(22)(e) and in the absence of indication in s. 2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a non-shareholder cannot be taxed as deemed dividend in the hands of a nonshareholder. 38. The basic characteristic of dividend as held by the apex Court in the case of Kantilal Manilal vs. CIT (1961) 41 ITR 275 (SC) is a share of profits of the company given to its shareholders. Further, s. 206 of the Companies Act, 1956 prohibits payment of dividend to any person other than the registered shareholder. If one were to break up the natural meaning, the following two components emerge (a) dividend is a s....
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....nd and taxed in the hands of the concern then the benefit of set off cannot be allowed to the concern, because the concern can never receive dividend from the company which is only paid to the shareholder, who has substantial interest in the concern. The above provisions also therefore contemplate deemed dividend being taxed in the hands of a shareholder only. For the reasons stated above, we are of the view that the law laid down in the case of Nikko Technologies (I) (P) Ltd. (supra) is not correct. We therefore hold that deemed dividend under s. 2(22)(e) of the IT Act, 1961 can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other person. 41. In the light of the above discussion, the questions referred to the Special Bench are answered as follows : On the first question : 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. On the second question : The expression 'shareholder' referred to in s. 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but ....