TaxTMI 
TaxTMI 
2018 (12) TMI 1060
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.... in both the assessee company and MPPL and therefore the sum of Rs. 4 crores received as advance from MPPL was liable to be added as deemed dividend u/s. 2(22)(e) of the Act in the hands of the assessee company. The following table would show the common shareholding and their share holding in the Assessee company as well as MPPL: Sl. No. Name of the Director Percentage of Shareholding in the Assessee company Percentage of olding in Microfinish Pumps Pvt. Ltd. 1. Sri Tilak K. Vikamshi 24.99% 25% 2. Sri Deepak K. Vikamshi 24.99% 25% 3. Sri Tushar K. Vikamshi 24.99% 25% 4. Sri Mahendra K. Vikamshi 24.99% 25% 4. The plea of the assessee before the lower authorities was it was not a shareholder in MPPL and therefore the provisions of section 2(22)(e) of the Act cannot be invoked in the hands of assessee. In other words, the contention of the assessee was that the first condition to be satisfied for invoking the provisions of section 2(22)(e) of the Act was that the assessee should be a shareholder in the company which had given loan. The other contentions put forth by the assessee was that the funds were given for the bus....
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....s to deemed dividend within the meaning of the provisions of sec. 2(22)(e) of the Act, and the same is rightly brought to tax in the hands of the assessee company. In the result, the appeal on this ground is dismissed." 6. Aggrieved by the order of CIT(Appeals), the assessee has preferred the present appeal before the Tribunal. 7. The grounds raised by the assessee challenging the aforesaid addition are as follows:- "2. The learned CIT(A) was not justified in law in confirming the addition of the inter corporate deposit of Rs. 4,00,00,000/- as deemed dividend under section 2(22)(e) of the Act, in the hands of the appellant on the facts and circumstances of the case. 3. The learned CIT(A) was not justified in law in ignoring the fact that the appellant did not hold any shares in M/s Microfinish Pumps Pvt Ltd and hence was not eligible to receive any dividend and consequently provisions of section 2(22)(e) of the Act, are not applicable, on the facts and circumstances of the case. 4. The learned CIT(A) was not justified in fact in confirming the action of the assessing officer, in holding that the appellant has received a loan from M/s Microfinish Pum....
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....res, 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. 10. 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 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....
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....he 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% 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 Khur....
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....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 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." 13. The Special Bench further held as follows:- "34. We are of the view that the provisi....
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.... 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 nonshareholder 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 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 t....