TaxTMI 
TaxTMI 
2018 (3) TMI 305
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....f the assessee company as well as M/s. Shining Emotional Surplus (P)Ltd holding 95% of the shares in both the companies. The AO invoked the provision of section 2(22)(e) of the Act and treated the loan received as deemed dividend u/s 2(22)(e) of the Act. 4. On appeal by the assessee the CIT(A) deleted the addition made by the AO for the following reasons :- "3.1 Grounds of appeal no. a & b -. Assessee Co. had taken a loan of Rs.2,08,97,808/- from another Group concern M/s. Shining Emotional Surplus (P) Ltd. Both the companies has common share holder and Director, Mr. S.B.Renee Jhola, holding 95% of the shares in each of the two companies. A.O. has held the loan of Rs. 2,08,97,808/ - as deemed dividend u/s 2(22)(e) . In appeal proceedings, assessee co. has submitted that it is not a share holder in M/s. Shining Emotional Surplus (P) Ltd., from which loans were received. Hence provision of section 2(22(e) is not applicable in its case. In support of its proposition it has relied on the decision of the special Bench of Mumbai ITAT in the case of ACIT -vs- Bhowmik Colours (P) Ltd., 118 ITD 1 and the judgment of Hon'ble Bombay High Court in the case of ACIT-vs-Britto Amu....
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.... 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." Explanation-3 to Section 2(22)(e) is as follows: "Explanation-3: For the purpose of this clause- (a) "concern" means a Hindu Undivided Family, or a firm or an association of persons or a body of individuals or a company; (b) A person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any 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 with....
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.... 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 concern will be dividend. 7.4. The Special Bench of ITAT, Mumbai, in the case of Bhaumik Color Labs ITA 5030/M/04, 118 ITD 1 (SB) (Mum), considered the question Whether deemed dividend u/s. 2(22)(e) of the Income Tax Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender? The Special Bench held 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 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 ....
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....n 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 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 pad 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 section 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 firm, but then, thereby the deemed dividend would not be deemed dividend in the hands of the firm, rather it would obvious....
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....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 Act, 1987 w.e.f 1-4-88 is to ensure that persons who control the affairs of a company as well as that of a firm can have the payment made to a concern from the company and the person who can control the affairs of the concern can drawn the same from the concern instead of the company directly making payment to the shareholder as dividend. The source of power to control the affairs of the company and the concern is the basis on which these provisions have been made. 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., no....