TaxTMI 
TaxTMI 
2018 (1) TMI 11
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....e) of the Income Tax Act, 1961 (Act). The assessee submitted that it was not a shareholder in M/s. J.K.M.Overseas (P) Ltd., and consequently the amount could not be held to be deemed dividend by applying the provisions of section 2(22)(e) of the Act. 3. The AO however, was of the view that though the Assessee was not a shareholder in M/s. J.K.M.Overseas (P) Ltd., one Smt.Indu Modi was a common shareholder in both the Assessee and M/s. J.K.M.Overseas (P) Ltd., holding 54% and 76.5% paid up share capital respectively in the aforesaid two companies and therefore the provisions of Sec.2(22)( e) of the Act would be attracted. The AO ultimately passed an order treating the loan in question as a deemed dividend in the hands of the Assessee. 4. On appeal by the Assessee the CIT(A) deleted the addition made by the AO accepting the contention of the Assessee that the assessee company was not a shareholder in M/s. J.K.M.Overseas (P) Ltd., and deemed dividend cannot be taxed in the hands of a non shareholder as held by ITAT Kolkata in the case of DCIT Vs. Madhusudan Investment & Trading (P) Ltd., (2011) 15 taxmann.com 252 (kol). 5. Aggrieved by the order of the CIT(A), the revenue has....
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....y time during the previous year, beneficially entitled to not less than twenty percent of the income of such concern;" 7.1. 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 percent of the voting power. 7.2. An analysis of the above provisions shows that there are three limbs to Sec.2(22)(e) which are as follows:- "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 company or otherwise) made after the 31-5-1987, 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 per cent of the voting power, Second limb (b) or to any concern in which such shareholder is a member or a partner and in wh....
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....er than a shareholder. The Special Bench on the above issue has observed as follows:- "30. At the outset it has to be mentioned that provisions of Sec.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.1-4-88 viz., payment by a company "to any concern in which such shareholder is a member or a partner and in which he has a substantial interest" do not say as to in whose hands the dividend has to be brought to tax, whether in the hands of the "concern" or the "shareholder". 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 CIT Vs. Hotel Hilltop. 217 CTR 527(Raj). The facts of the case before the Hon'ble Court were as follows. The Assessee was one M/S.Hotel Hilltop a partnership firm. This firm received an advance of Rs. 10 lacs from a company M/S.Hilltop palace Hotels (P) Ltd. The shareholding pattern of M/S.Hillltop Palace Hotels (P) Ltd., was as follows: 1. Shri Roop Kumar Khurana : 23.33% ....
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....arning 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 firm, but then, thereby the deemed dividend would not be deemed dividend in the hands of the firm, rather it would obviously be deemed dividend in the hands of the individuals, on 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 divided, 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 o....
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..... It is therefore proper to construe those provisions as contemplating a charge to tax in the hands of the shareholder and not in the hands of a non-shareholder viz., concern. A loan or advance received by a concern is not in the nature of income. In other words there is a deemed accrual of income even u/s.5(1)(b) in the hands of the shareholder only and not in the hands of the payee viz., non-shareholder (Concern). Sec.5(1)(a) contemplates that the receipt or deemed receipt should be in the nature of income. Therefore the deeming fiction can be applied only in the hands of the shareholder and not the non-shareholder viz., the concern. 37. The definition of Dividend U/s.2(22)(e) of the Act is an inclusive definition. Such inclusive definition enlarges the meaning of the term "Dividend" according to its ordinary and natural meaning to include even a loan or advance. Any loan or advance cannot be dividend according to its ordinary and natural meaning. The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word "Dividend" is extended to loans and advances to a....
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....the revenue. 9. Ground No.6 raised by the revenue reads as follows :- "6. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred by ignoring that dividend income falls under the head, of income 'Income from Other Source' and the AO rightly put the Dividend Income under the appropriate head of income and rightly computed the disallowance u/s. 14A of the Act read with Rule 8D." 10. The Assessee is a company engaged in the construction business. The assessee earned dividend of Rs. 66,354/- from its investment in shares and mutual funds. The assessee claimed the said income as business income and offered it to tax, though the dividend income in question was exempt u/s 10 of the Act. The assesee had not claimed any exemption. The AO was of the view that the dividend in question was exempt u/s 10 of the Act and therefore the assesee ought not to have offered the said income to tax and that the assessee should have calculated expenses incurred in earning the exempt income and disallowed such expenses while computing the total income. The AO computed the disallowance in terms of Rule 8D r.w.s. 14A of the Act of Rs. 1,34,008/-. He exclude....
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....lowance of interest expenses can be made. A perusal of profit and loss account shows that assessee has incurred office and administrative expenses of Rs. 7,46,512/-. The details of this expenses are given in Schedule-15 to the schedule to the profit and loss account. None of the expenses debited in the profit and loss account can be attributed to the activity of earning tax free income. The details of the office and administrative expenses are as follows :- 16. The AO has not given the basis on which he arrived at the disallowance u/s 14A of the Act. In the absence of the basis of the disallowance by the AO we are of the view that the addition made by the AO was rightly deleted. Ground No.6 is accordingly dismissed. 17. Ground No.7 raised by the revenue reads as follows :- "7. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred by giving relief to the assessee on the issue of addition of receipt of undisclosed insurance commission whereas, he did not raise any objection to the correction of ITS details available with the department regarding receipt of the said commission income." 18. The AO on scrutiny of ITS details was of the vi....