TaxTMI 
TaxTMI 
2024 (2) TMI 1278
X X X X Extracts X X X X
X X X X Extracts X X X X
....sfied and the assessee company is not a shareholder of lender company. 2. Brief facts of the case are that a search was conducted in the case of Shri Shanmugam Thiagarajan, Smt. Unnamalai Thiagarajan, Smt. Rukmini Thiagarajan, M/s. ETL Power Services Limited, M/s. IG3 Infra Limited on 04.11.2020. The assessee company M/s. MAC Quality Builders Private Limited is also a part of the group companies of M/s. IG3 Infra Limited. During the search proceedings, materials were seized in the case of M/s. IG3 Infra Limited and the assessee company. Neither there are common shareholder between the lender company nor the assessee. For the sake of convenience, since the issue and facts are similar in all assessee's case, the facts of M/s. MAC Quality Builders Private Limited has been considered for adjudication. 3. The assessee company is engaged in the business of real estate. The assessee company has filed the return of income under section 139(1) of the Act on 02.03.2022 and declared a total loss of Rs..8,60,35,790/-. 4. The Assessing Officer has stated that the material seized vide ANN/BS/IG/LS/S-4 and ANN/BS/IG/LS/S-6 during the course of search conducted in the case of Shri Shanmug....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s and noted that the same were prepared on a much later date when compared with the date of payment to the assessee and the date of invoices. The mail communication between [email protected] and [email protected] has shown that the purchase orders were prepared and sent by Shri Yogeshwaran of M/s. IG3 Infra Limited on 30.09.2020 whereas the dates mentioned in the purchase orders are in the month of December 2019. The copies of the relevant emails purchase orders and bills of quotation were seized vide ANN/BS/IG/LS/S-6. 7. In his sworn statement recorded under section 132(4) of the Act dated 05.11.2020, Shri Yogeshwaran, Purchase manager stated that the purchase orders and the Bills of Quotation (BoQ) were prepared on the instructions of Smt Rukmini Thiagaraian at later date. Thus, it is evident that the purchase orders and BoQ were prepared at a much later date after the dates of payments. The payments to the assessee company and four other group companies were made in April, May and June 2020 whereas the purchase orders were prepared in October, 2020, though they were dated as December 2019. The Assessing Officer has noted that the payments aggregating to Rs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....her group companies to M/s.IG3 Infra Limited. 10. On the basis of the above findings during the search, the AO observed that the assessee company and four other group companies were used by the promoters of M/s. IG3 Infra Limited to divert funds of the said company for their own benefit and purpose. Further, a statement under section 131 of the Act was recorded from Shri Sasikumar, one of the Directors of the assessee company and that he had accepted that invoices were raised without carrying out any work. Smt Rukmini Thiagarajan has also admitted vide letter dated 03.02.2021 that funds were transferred from M/s.IG3 Infra Limited to the assessee company and four other group companies and that it was inadvertently recorded in the books of account as "Capital Work In Progress" instead of "Loans". Accordingly, the Assessing Officer has concluded that the amounts paid to the assessee company and four other group companies by M/s. IG3 Infra Limited during the previous year relevant to AY 2021-22 represent loans advanced by the said company. 11. The Assessing Officer has identified that the appellant company and four other group companies, to whom M/s.IG3 Infra Limited has advanced....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erved that the shares of the assessee company were transferred to Shri Sikandar Mohammed Rafi and Ms. Anu Abraham on 23.04.2020 just 3 days prior to the first transfer of funds from M/s.IG3 Infra Limited to the assessee on 27.04.2020 in order to avoid the provisions of section 2(22)(e) of the Act and payment of taxes under the Act. On analysis of the old and new share holding pattern of the assessee company and corporate structure of M/s. IG3 Infra Limited, it is clear that the assessee company is a group concern of M/s. IG3 Infra Limited in which the family of Thiagarajan has substantial interest and the ultimate shareholders of the assessee company are Shri Shanmugam Thiagarajan, Smt Unnamalai Thiagarajan and Smt Rukmini Thiagarajan. The AO observed that the reserves and surplus of M/s. IG3 Infra Limited as on 31.03.2020 amounted to Rs..257,62,37,000/-. The AO also observed that these facts clearly establish that the fund transfers by way of loans to the tune of Rs..88,91,90,240/- to the assessee by M/s. IG3 Infra Limited is nothing but dividend payments by M/s. IG3 Infra Limited to the benefit of shareholders in terms of the provisions of section 2(22)(e) of the Act. The AO stat....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... payment of Rs..88,91,90,240/- by M/s. IG3 Infra Limited to the assessee company was liable to be treated as deemed dividend under section 2(22)(e) of the Act in the hands of the assessee company as the same does not exceed the accumulated profits of M/s. IG3 Infra Limited as on 31.03.2020 and accordingly, made addition of Rs..88,91,90,240/- under section 2(22)(e) of the Act. 14. The assessee carried the matter in appeal before the ld. CIT(A). After considering the detailed written submissions of the assessee, the ld. CIT(A) has observed as under: 28. I have given careful consideration to the findings of the AO, the written submission of the appellant and the material available on record. In the assessment order, the AO treated the loan of Rs. 88,91,90,240/- advanced by M/s.IG3 Infra Limited to the appellant company on various dates during the period from 27.04.2020 to 25.06.2020 as income liable to tax in the hands of the appellant company by way of deemed dividend us 2(22)(e) of the Act. In the grounds of appeal, the appellant contended that the provisions of sec 2(22)(e) are not applicable to its case since neither the appellant company nor its present shareholders (....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that the loan given by M/s.IG3 Infra Limited to the appellant company amounted to a payment made for the benefit or on behalf of the members of Thiagarajan family i.e. Shri Shanmugam Thiagarajan, Smt. Unnamalai Thiagarajan and Smt. Rukmini Thiagarajan and that such payment falls under the scope of deemed dividend u/s 2(22)(e) is erroneous since none of the said persons were shareholders in MsIG3 Infra Limited at the time of advancing the loan to the appellant company. 6) Though the AO asserted in the assessment order that Shri Shanmugam Thiagarajan, Smt. Unnamalai Thiagarajan and Smt. Rukmini Thiagarajan are the ultimate shareholders of MsIG3 Infra Limited as well as the appellant company, he has not substantiated the said assertion by any cogent material or reasoning. Further, the AO did not bring out any corroborative evidence to substantiate his finding that the ultimate shareholders have benefitted from the loan transactions even though they were not the shareholders in M/s. IG3 Infra Limited at the time of advancing the loan to the appellant company. 30. The contentions put forth by the appellant have been carefully examined in the light of the facts of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ispute with regard to the satisfaction of the conditions listed at Sl. Nos.1 & 4 above. As regards the conditions listed at Sl. Nos.2 & 3 above, it needs to be established that there is a common shareholder (being a person who is the beneficial owner of shares) between M/s. IG3 Infra Limited and the appellant company and that such common share holder holds not less than 10% of the voting power in M/s.IG3 Infra Limited and not less than 20% of the voting power in the appellant company at the time of advancing the loan by M/s.IG3 Infra Limited to the appellant company in order to hold that the said conditions have been satisfied. 34. In this connection, it is important to understand the meaning of the expression "shareholder, being a person who is the beneficial owner of shares" used in sec 2(22)(e). The interpretation of the said expression has been the subject matter of the decisions of Hon'ble Delhi High Court in the case of CIT vs. Ankitech Private Limited (2012) 340 ITR 14 (Delhi) and the Hon'ble Supreme Court in the case of CIT vs Madhur Housing and Development Co. (2018) 401 ITR 152 (SC), In the case of CIT vs Ankitech Private Limited (Supra), the Hon'ble ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ra). In this case, the company advanced the loans to the assessee HUF who was the beneficial owners of the shares in the company, but the shares were registered in the name of the individual Karta, who held the shares for and on behalf of the HUF On the above facts, the question before the Supreme Court was whether the loans advanced to the HUF beneficial owner of the shares-would be taxed as deemed dividend in the hands of the HUE The Supreme Court held that the HUF being only the beneficial shareholder and not a registered shareholder would not fall within the purview of Section 2(6A)(e) of the 1922 Act. The apex Court observed as follows: .....What Section 2(6A)(e) is designed to strike at is advance or loan to a 'shareholder' and the word 'shareholder' can mean only a registered shareholder. It is difficult to see how a beneficial owner of shares whose name does not appear in the register of shareholders of the company can be said to be a 'shareholder'. He may be beneficially entitled to the share but he is certainly not a 'shareholder'. It is only the person whose name is entered in the register of the shareholders of the company as the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on "being" is a present participle. A participle is a word which is partly a verb and partly an adjective. In Section 2(22)(e) the present participle "being" is used to described the noun 'shareholder' like an adjective. The expression "being a person who is the beneficial Owner of shares" is therefore a further requirement before a shareholder can be said to fall within the parameters of Section 2(22)(e) of the Act. In the 196l Act, Section 2(22)(e) imposes a further condition that the shareholder has also to be 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 poser. It is not possible to accept the contention of the learned Departmental Representative that under the 1961 Act there is no requirement of a shareholder being a registered holder and that even a beneficial ownership of shares would be sufficient. 24. The expression "shareholder being a person who is the beneficial owner of shares" referred to in the first limb of Section 2(22)(e) refers to both a registered shareholder and beneficial shareholder If a person is a r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs of the appellant company upto 23.04.2020 were M/s. Southern Project Management Private Limited holding 99.80% of the voting power, Smt. Unnamalai Thiagarajan holding 0.1% of the voting power and Smt. Rukmini Thiagarajan holding 0.1% of the holding power. The said shareholders are hereinafter referred to as the previous shareholders'. The shareholders of the appellant company after 23.04.2020 are Shri. Sikandar Mohammed Rafi holding 99.90% of the voting power and Ms. Anu Abraham holding 0.1% of the voting power. The said shareholders are hereinafter referred to as the 'present shareholders'. 39. The existence of a common registered and beneficial shareholder between M/s.IG3 Infra Limited and the appellant company has to be seen at the time of release of various tranches of the loan to the appellant company during the period from 27.04.2020 to 25.06.2020. During the said period, the appellant company has new shareholders as mentioned in the preceding paragraph. On comparing the registered shareholders of M/s.IG3 Infra Limited and the appellant company during the period of advancing the loans, it is noticed that there is no common registered shareholder between....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs prior to 23.04.2020) is legally permissible for the purpose of the second limb of sec 2(22)(e) and it is only the shareholders at the time of advancing the loans who need to be considered for the said purpose. This proposition has been laid down by the Hon'ble Allahabad High Court in the case of CIT vs HK Mittal (1996) 219 ITR 420. The Hon'ble High Court held in the said case that the chief ingredient of sec 2(22)(e) is that one should be a shareholder on the date the loan was advanced. 43. Notwithstanding the legal infirmity in the comparison made by the AO between the shareholders of M/s.IG3 Infra Limited and the previous shareholders of the appellant company as stated in the preceding paragraphs, it is found that the finding rendered by the AO based on the said comparison is also without factual basis. It is seen that the AO did not furnish any reasons or data or documentary evidence in support of his finding that the ultimate shareholders of both the companies are Shri Shanmugam Thiagarajan, Smt. Unnamalai Thiagarajan and Smt. Rukmini Thiagarajan. Consequently, the said finding which is unsubstantiated on facts cannot be taken into consideration. 44....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... above. As regards the conditions listed at S. Nos.2 &3 above, it is pertinent to state that the shareholder (holding not less than 10% of the voting power) of the company on whose behalf or for whose individual benefit the payment is made by the company is required to be a "registered and beneficial shareholder" as per the ratio laid down by the Hon'ble Delhi High Court in the case of CIT vs Ankitech Private Limited (Supra) and the Hon'ble Supreme Court in the case of CII Vs Madhur Housing and Development Co. (Supra), as already discussed earlier in this order. 48. In the Assessment Order, the AO rendered a factual finding that the ultimate shareholders of both M/s.IG3 Infra Limited and the appellant company are Shri. Shanmugam Thiagarajan, Smt. Unnamalai Thiagarajan and Smt. Rukmini Thiagarajan and that the funds transferred by way of loans by M/s.IG3 Infra Limited to the appellant company are for the individual benefit of the said ultimate shareholders and that the appellant received the said funds on behalf of the ultimate shareholders. In this regard. it is seen that the AO did not furnish any reasons or data backed by evidence in support of his finding that t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of supporting reasons along with cogent evidences, the above mentioned finding of the AO is held to be unsubstantiated and untenable. 51. In the light of the discussion above, it is evident that the mandatory conditions for invoking the provisions of the third limb of sec 2(22)(e) are not satisfied in the facts of the appellant's case, in as much as the payment made by M/s.IG3 Infra Limited to the appellant company by way of loans cannot be regarded as a payment made on behalf or for the individual benefit of a registered and beneficial shareholder of M/s.IG3 Infra Limited holding not less than 10% of the voting power. Hence, it is required to be held that the third limb of sec 2(22)(e) cannot be invoked in the case of the appellant for the purpose of treating the amount received from M/s.IG3 Infra Limited as deemed dividend in its hands. Person in whose hands deemed dividend, if any, is taxable 52. Notwithstanding the findings rendered above that the conditions prescribed in sec 2(22)(e) are not satisfied in the facts of the appellant's case in order to hold that the provisions of deemed dividend are attracted, another issue which needs considera....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he expression 'dividend', clause 2(22) brings within its purview items which may not ordinarily constitute the payment of dividend. Parliament has expanded the ambit of the expression 'dividend' by providing an inclusive definition. 9. In order that the first part of clause (e) of Section 2(22) is attracted, the payment by a company has to be by way of an advance or loan. The advance or loan has to be made, as the case may be, either to a shareholder, being a beneficial owner holding not less than ten per cent of the voting power or to any concern to which such a shareholder is a member or a partner and in which he has a substantial interest. The Tribunal in the present case has found that as a matter of fact no loan or advance was granted to the assessee, since the amount in question had actually been defalcated and was not reflected in the books of account of the assessee. The fact that there was a defalcation seems to have been accepted since this amount was allowed as a business loss during the course of assessment year 2006- 2007. Consequently, according to the Tribunal the first requirement of there being an advance or loan was not fulfilled.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sion of the Hon'ble High Court is extracted as under: 9. The more 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 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 concern firm. In which event, it would fall within the expression "deemed dividend" Obviously, income from dividend, is taxable as income from other sources, under Section 56 of the Act, 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 Roop Kumar and Devendra Kumar, are the common persons,....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to -shareholder. When we keep in mind this aspect, the conclusion would be obvious, viz, loan or advance given under the conditions specified under Section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non members. The second category specified under Section 2(22) (e) of the Act, Viz., a concern (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 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ount to escapement of income at the hands of those shareholders. 56. The Hon'ble Madras High Court (the Jurisdictional High Court) has also held in the case of Pr. CIT vs Ennore Cargo Terminal P Ltd (2018) 406 ITR 477 (Mad) that the deemed dividend can only be assessed in the hands of the registered shareholder for whose benefit the money was advanced. The relevant portion of the decision of the Hon'ble High Court is extracted as under: 4. Insofar as Question Nos.3 and 4 are concerned, the following brief facts are required to be noticed: 4.1. The assessee-company, evidently, received a capital advance in a sum of Rs. 1,09,50,000/- from an entity by the name of Indev Logistics Pvt. Ltd. The assessee-company as well as the said entity, i.e. Indev Logistics Pvt. Ltd., admittedly have common shareholders. The shares in the assessee company to the extent of 50% are held by Mr. Xavier Britto, while the balance shares are held by Smt. Vimalarani Britto. In so far as Indev Logistics Pvt. Ltd. is concerned, shares are held likewise by the said individuals, though in a different ratio. Mr. Xavier Britto holds 60% of the shares in Indev Logistics Pvt. Ltd.,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hareholder. 5.2. In the instant case, however, both the registered and beneficial shareholders are two individuals and not the assessee-company. Therefore, in our view, the judgement of the Supreme Court does not rule on the issue which has come up for consideration in the instant matter. 6. Accordingly, in so far as questions Nos. 3 and 4 are concerned, we find that no interference is called for with the view taken by the Tribunal via the impugned order. In these circumstances, the Revenue's appeal, i.e. T.C. (A) No. 105 of 2017, pertaining to AY 2007-08, with regard to the said questions, is dismissed. 57. It is also pertinent to state that the Hon'ble ITAT Chennai (the Jurisdictional Tribunal) has also considered the issue in the case of Pallava Resorts Private Limited Vs ITO (2022) 143 taxmann.com 08 (Chennai-Trib) and held that the amount of loan received by the assessee company from its holding company is not taxable as deemed dividend u/s 2(22)(e) in the hands of the assessee company and the same is taxable in the hands of the common registered shareholders only. The relevant portion of the decision of the Hon'ble Tribunal is extracted ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Checkpoint Apparel Labelling Solutions (India) Ltd. [2020] 120 taxmann.com 125/[2021] 276 Taxman 312 (Mad) wherein it has held that since the recipient of the loan was not a shareholder in a company from which loan was received, hence loan cannot be assessed as deemed dividend. (c) The decision of the Mumbai High Court in the case of CIT v. Jignesh P Shah [2015) 54 tamann.com 293/229 Taxman 302/372 ITR 392 wherein it has held that the provision of 'section 2(22) (e) of the Act cannot be invoked unless the Assessee itself is a shareholder of the company who was lending money to him. (d) The decision of the Coordinate Bench of this Tribunal, Mumbai Benches in the case of the Bombay Oil Industries Ltd. v Dy CIT (2009] 28 SOT 383, wherein it is held that "section 2(22) (e) of the Act enacts a deeming fiction whereby the scope and ambit of the word dividend has been enlarged to bring within its sweep certain payments made by a company as per the situations enumerated in the Section. Such a deeming fiction would not be given a wider meaning that what it purports to do. The provisions would necessarily be accorded strict interpretation and the ambit of the fiction would not be pressed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....place in the case of Shri. Shanmugam Thiagarajan, Smt. Unnamalai Thiagarajan, Smt. Rukmini Thiagarajan, M/s. ETL Power Services Limited and M/s. IG3 Infra Limited on 04.11.2020. The ld. DR further submitted that the assessee companies are part of group companies of M/s. IG3 Infra Limited and materials relating to M/s. IG3 Infra Limited and the assessee companies are seized during the course of search. 15.1 The ld. DR has drawn our attention to the assessment order where Balance Sheet of M/s. IG3 Infra Limited as on 31.03.2020 and 03.11.2020 as seized is extracted by the Assessing Officer. Referring to the Balance Sheet, the ld. DR submitted that there was a huge increase in the Capital Work in Progress of M/s. IG3 Infra Limited between 31.03.2020 and 03.11.2020. It was submitted that Capital Work in Progress as on 31.03.2020 was Rs..366,83,51,830/- whereas the same was Rs..714,01,89,265/- as on 03.11.2020. Thus, there was an increase of Rs..347,18,37,435/- between 31.03.2020 and 03.11.2020. The ld. DR submitted that the increase in Capital Work in Progress was attributable to the payments made to the following assessee companies: S.No Name of the companies Amount (Rs.) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....IG3 Infra Limited is situated in SEZ and all the movement of goods in and out of the premises of M/s. IG33 Infra Limited are to be entered in register maintained by the nodal officer of SEZ. It is submitted that the registers seized during the course of search proved that no goods were actually delivered by the assessee companies in respect of payments received from M/s. IG3 Infra Limited. 15.4 The Ld. DR also submitted that Ms. Rukmini Thiagarajan vide letter dated 03.02.2021 admitted that the funds transferred by M/s. IG3 Infra Limited to the assessee companies are loans which were inadvertently recorded as Capital Work in Progress in the books of account. The ld. DR argued that had there been no search, loan payments would have been accounted as Capital Work in Progress to escape from the applicability of deemed dividend provisions. It is the submission of the Ld. DR that all the assessee companies are related to each other and connected with M/s. IG3 Infra Limited and operating under the instructions of family members of Shri Thiagarajan who are the promoters of M/s.IG3 Infra Limited. Thus, the ld. DR submitted that the loans given by M/s. IG3 Infra Limited to the assessee c....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... hand, the ld. Counsel for the assessee companies vehemently supported the order of the ld. CIT(A). The ld. Counsel submitted that the impugned issue is taxability of loans received by the assessee companies from M/s. IG3 Infra Limited, whether such loans can be taxed as deemed dividends in the hands of the assessee companies or not. The ld. Counsel referring to the provisions of section 2(22)(e) of the Act submitted that the foremost condition to attract the applicability of section 2(22)(e) of the Act is the recipient or benefitted shareholder should hold not less than 10% of the voting power in both lender and payee company implying only equity share holders are covered since voting power comes only with the holding of equity shares. The ld. Counsel invited our attention to the shareholding pattern of M/s. IG3 Infra Limited as follows: S.No. Name of the shareholder Percentage of equity share holding (%) 1 ETL Power Services Limited 89.56 2 Green Grid Group Pte Limited 7.86 3 IL & FS Trust Co Ltd, A/c IL & FS Pvt. Equity Trust- IL & FS Reality Fund 1.77 4 Elnet Technologies Limited 0.8 5 Unnamalai Thiagarajan (beneficial interest....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hares either in M/s. IG3 Infra Limited or in the assessee companies, the question of invoking section 2(22)(e) does not arise even after invoking third limb of section 2(22)(e) of the Act. 16.1 The ld. Counsel further submitted that both M/s. Southern Projects Management Limited and M/s. Stur Power Sector Management Private Limited who own equity shares of the assessee companies before the change in the shareholding does not own any equity shares either in M/s. ETL Power Services or in M/s. IG3 Infra Limited. In view of this, the Ld. Counsel submitted that a change in shareholding pattern of the assessee companies is immaterial and cannot be the criteria to invoke section 2(22)(e) of the Act. The Ld. Counsel submitted that there are no common equity shareholders between M/s. IG3 Infra Limited and the assessee companies. It is submitted that these are undisputed facts which the Ld. CIT(A) has rightly discussed in detail in his appellate order. In this, the Ld. Counsel submitted that the provisions of section 2(22)(e) of the Act will not come into picture as the primary condition of being a equity shareholder with not less than 10% of the voting power is not satisfied. 16.2 The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ect Tax Vivad se Vishwas Scheme, no binding precedent arises from such judgement and accordingly submitted that the case of CIT v. Ankitech (P.) Ltd (supra) as affirmed by the Hon'ble Supreme Court is the only binding judgement on the issue that a shareholder should be both registered and beneficial. In view of this, the Ld. Counsel submitted that the decision of Ld.CIT(A) in placing reliance on the judgement of CIT v. Ankitech (P.) Ltd (supra) is valid and requires no interference. 16.5 The Ld. Counsel submitted that the Ld. CIT(A) has rightly held that the relevant date for determining the shareholding for the purpose of section 2(22)(e) is the date on which loan has been advanced and not any other date. In support of this, the Ld. Counsel placed reliance on the judgement of the Allahabad High Court in the case of CIT v. H.K. Mittal [1996] 219 ITR 420 (All). The Ld. Counsel placed further reliance on the decision of the Mumbai Bench of this Tribunal in the case of KIIC Investment Company v. DCIT [2019] 101 taxmann.com 19 (mum-Trib) and submitted that the relevant date for ascertaining the shareholding is the date of granting of loan. 16.6 The Ld. Counsel submitted that the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Amount of addition u/s 2(22)(e) of the Act (Rs.) 1. MAC Quality Builders Pvt. Ltd. 88,91,90,240 88,91,90,240 2. Mukunda Land Developers Private Ltd. 51,07,07,558 51,07,07,558 3. Mugilan Structurals Pvt. Ltd. 37,79,01,900 37,79,01,900 4. Minal Contractors and Builders Pvt. Ltd. - Addition restricted to the extent of balance of available surplus of IG3 Infra Limited 88,10,38,052 7,15,85,181 5. Meadows Infrastructure Pvt. Ltd. 72,68,52,121 72,68,52,121 Total 338,56,89,871 257,62,37,000 The shareholding of the assessee companies undergone change just three days prior to the transfer of first tranche of loans. It is found during the course of search that loans were advanced by M/s. IG3 Infra Limited to the assessee companies on the instructions of Ms. Rukmini Thiagarajan. The Assessing Officer viewed the change in the shareholding as a mechanism adopted by the assessee companies to overcome the clutches of applicability of the provisions of section 2(22)(e) of the Act. The Assessing Officer called upon the assessee companies to explain why the addition towards deemed dividend should not be made in thei....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Act means registered and beneficial shareholder. For this proposition, Ld. CIT(A) drawn support from the judgement of the Hon'ble Delhi High Court in the case of CIT v. Ankitech (P.) Ltd [2011] 340 ITR 74 (Del) as affirmed by the Hon'ble Supreme Court in CIT v. Madhur Housing & Development Co [2018] 401 ITR 152 (SC). Thus, the Ld. CIT(A) held that since there is no common registered and beneficial shareholder between M/s. IG3 Infra Limited and the assessee companies the second limb of section 2(22)(e) is not applicable. 17.4 The Ld. CIT(A) held that the Assessing Officer failed to bring on record any cogent material to support that the family members of Shri Thiagarajan are the ultimate beneficiaries of loans advanced by M/s. IG3 Infra Limited to the assessee companies. The Ld. CIT(A) has held that the third limb is also not applicable to the facts of the impugned issue considering the fact that none of the family members of Thiagarajan family satisfy the legal requirements for being treated as "shareholder, being a person who is the beneficial owner of shares" holding not less than 10% of the voting power, so as to attract the provisions of the third limb of section 2(22)(e) of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot 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 ;" 18.1 From the bare reading of the section, it is clear that section 2(22)(e) of the Act is attracted under the following three circumstances: i. Loan advanced by a closely held company to a shareholder; ii. Loan advanced by a closely held company to a concern in which such shareholder has substantial interest; and iii. Payment made by a closely held company on behalf or for the benefit of a shareholder. Therefore, the primary condition to attract section 2(22)(e) is the recipient of the loan or person benefitted should be a shareholder in the lender or payee company. Further, such shareholder should own not less than 10% of the voting power. It implies that only the equity share holders are covered since they are the ones who are eligible for voting powe....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a 'shareholder' and the word 'shareholder' can mean only a registered shareholder. It is difficult to see how a beneficial owner of shares whose name does not appear in the register of shareholders of the company can be said to be a 'shareholder'. He may be beneficially entitled to the share but he is certainly not a 'shareholder'. It is only the person whose name is entered in the register of the shareholders of the company as the holder of the shares who can be said to be a shareholder qua the company and not the person beneficially entitled to the shares. It is the former who is a 'shareholder' within the matrix and scheme of the company law and not the latter. We are, therefore, of the view that it is only where a loan is advanced by the company to a registered shareholder and the other conditions set out in section 2(6A)(e) are satisfied that the amount of the loan would be liable to be regarded as 'deemed dividend' within the meaning of section 2(6A)(e).' 22. It is thus clear from the aforesaid pronouncement of the Hon'ble Supreme Court that to attract the first limb of the provisions of section 2(22)(e) the payment mu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... It is not possible to accept the contention of the learned Departmental Representative that under the 1961 Act there is no requirement of a shareholder being a registered holder and that even a beneficial ownership of shares would be sufficient. 24. The expression "shareholder being a person who is the beneficial owner of shares" referred to in the first limb of section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial then the provision of section 2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the first limb of provisions of section 2(22)(e) will not apply." 18.2 The Hon'ble Supreme Court in the case of CIT v. Madhur Housing & Development Co (supra) has affirmed the judgement of the Hon'ble Delhi High Court in CIT v. Ankitech (P.) Ltd observing as follows: "The impugned judgement and order dated 1 1-5-2011 has relied upon a judgement of the same date by a Division Bench of the High Court of Delhi in ITA No. 462 of 2009. Having perused the judgement and having heard arguments, we are of the vi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ither a registered nor a beneficial shareholder. Thus with no stretch of imagination the assessee can be covered under the definition of Section 2(22)(2) i.e., deemed dividend. 25. The similar issue was come before the Hon'ble Kerala High Court in case of CIT v. Settlement Commission (IT & WT) [2009] 176 Taxman 421 where the Hon'ble High Court held as under:- "In this case, the Settlement Commission has rejected Ext. P2 on the ground that the issue raised is a debatable issue, But, I feel that when there is a decision of the Apex Court, no Inferior Court or Tribunal can say that the issue is a debatable issue for the reason that a Bench of two Judges of the Apex Court has doubted the correctness of the decision of the Constitution Bench. Even assuming there is a final judgement of a two Judges Bench of the Apex Court, the same has to be ignored and Inferior Courts and Tribunals are bound to follow the decision of the Constitution Bench in view of the law relating to precedents and also article 741 of the Constitution of India. So, the rejection of Ext. P2 application is unjustified." 26. In view of the above, the decision of the Hon'ble Suprem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....case of CIT v. Madhur Housing & Development Co. (supra). Thus, respectfully following the same, we hold that the shareholder referred to in section 2(22)(e) of Act implies registered and beneficial shareholder. 19. The next issue arises for consideration is the relevant date for determining the shareholding in order to examine the applicability of section 2(22)(e) of the Act. In this context, reliance is placed on the judgement of the Hon'ble Allahabad High Court in the case of CIT v. H.K.Mittal (1996) 219 ITR 420 (All), wherein it has been held as follows: "3. The chief ingredient of sub-clause (e) to clause (22) of section 2 of the Act is that one should be a shareholder on the date the loan was advanced and according to the Tribunal that ingredient having not been established, the advance could not be taken as deemed dividend under section 2(22)(e). " 19.1 The Mumbai Bench of this Tribunal in the case of KIIC Investment Company v, DCIT [2019] 101 taxmann.com 19 (Mum-Tab) has held as follows : "35. A perusal of Sec. 2(22)(e) of the Act would reveal that three types of payments are covered within its fold which are deemed to be understood as 'dividend&#....
X X X X Extracts X X X X
X X X X Extracts X X X X
....idual benefit of any shareholder of Portescap; and, in any case it cannot be straightaway inferred that the payments made on 29.30.2009, 02.03.2010 and 03.03.2010 to GVR were for the individual benefit of the assessee considering that assessee was not even a shareholder of Portescap on the aforesaid dates. Thus, there is no justification for the CIT(A) to invoke the third limb) of Sec. 2(22)(e) of the Act in the present situation. Thus, on this aspect, so far as the inclusion of Rs. 90,00,00,000/- paid by Portescap to GVR within the scope of Sec. 2(22){e) of the Act is concerned, the same is quite untenable. We hold so." Respectfully following the same, we hold that the relevant date for determining the shareholding is the date of advancing of the loans. 20. In the case of assessee companies, neither the assessee companies nor its shareholders are the shareholders of M/s. IG3 Infra Limited as on the date of advancing of loans. Further, there are no common registered and beneficial shareholders between M/s. IG3 Infra Limited and the respondent companies on the date of advancing of loans. Even prior to change in the shareholding pattern of the respondent companies, it is not th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in the hands of the shareholder and not in the hands of the concern in which such shareholder has substantial interest which received the loan. The relevant portion of the judgement is extracted as under: "8. Clause (e) of section 2(22) is not artistically worded. For facility of exposition, the contents can be broken down for analysis : (i) Clause (e) applies to any payment by a company not being a company in which the public is substantially interested of any sum, whether as representing a part of the assets of the company or otherwise made after the 31 May, 1987; (ii) Clause (e) covers a payment made by way of a loan or advance to (a) a shareholder, being a 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; or (b) any concern in which such shareholder is a member or a partner and in which he has a substantial interest; (iii) Clause (e) also includes in its purview any payment made by a company on behalf of or for the individual benefit, of any such shareholder; (iv) Clause (e) will apply to the extent to which the company, in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ayment made by a company on behalf, of for the individual benefit, of any such shareholder is treated by clause (e) to be included in the expression 'dividend'. Consequently, the effect of clause (6) of section 2(22) is to broaden the ambit of the expression 'dividend' by including certain payments which the company has made by way of a loan or advance or payments made on behalf of or for the individual benefit of a shareholder. The definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. Consequently in the present case the payment, even assuming that it was a dividend, would have to be taxed not in the hands of the assessee but in the hands of the shareholder. The Tribunal was. in the circumstances, justified in coming to the conclusion that, in any event, the payment could not be taxed in the hands of the assessee. We may in concluding note that the basis on which the assessee is sought to be taxed in the present case in respect of the amount of Rs. 32,00,000 is that there was a dividend under section 2(22)(e) and no other basis has been suggested in the order of the Assessing Officer. " 22.2 Similar view was expr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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 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) of the Act is to tax dividend in the hands of shareholders. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance. 25. Further, it is an admitted case that under normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under section 2(22)(e) of the Act. We have to keep in m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....agree with the observations of the Mumbai Bench decision in Bhaumik Colour (P.) Ltd.'s case (supra) that such observations are not binding on the Courts. Once it is found that such loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not a shareholder, and that according to us is the correct legal position, such a circular would be of no avail. 29. No doubt, the legal fiction/deemed provision created by the Legislature has to be taken to 'logical conclusion' as held in Andaleeb Sehgal's case (supra). The revenue wants the deeming provision to be extended which is illogical and attempt is to create a real legal fiction, which is no{ created by the Legislature. We say at the cost of repetition that the definition of shareholder is not enlarged by any fiction. 30. Before we part with, some comments are to be necessarily made by us. As pointed out above, it is not in dispute that the conditions stipulated in section 2(22)(e ) of the Act treating the ban and advance as deemed dividend are established in these cases Therefore, it would always be open to the revenue to take corrective measure by treating this dividend income at....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e registered shareholders and not in the hands of the assessee-company. 4.4. In our view, on a plain reading of the provisions of Section 2 (22) (e) of the Act, no other conclusion can be reached. As a matter of fact, a Division Bench of this Court, in the case of Commissioner of Income Tax vs. Printwave Services P. Ltd., (2015) 373 ITR 665 (Mad.), has reached a somewhat similar conclusion. 5. Mr.Senthil Kumar, however, contends to the contrary and relies upon the judgement of the Supreme Court in Gopal and Sons (HUF) VS. Commissioner of Income-tax, Kolkata-XI, (2017) 77 taxmann.com 71 (SC). 5.1.In our view, the question of law considered by the Supreme Court in the case of Gopal and Sons (supra) was different from the issue which arises in the present matter. The question of law which the Supreme Court was called upon to consider was whether loans and advances received by a HUF could be deemed as a dividend within the meaning of Section 2(22) (e) of the Act. The assessee in that case was the HUF and the payment in question was made to the HUF. The shares were held by the Karta of the HUF. It is in this context that the Supreme Court came to the conclusio....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 761 (Mds.) of 2014]. We noted that identically in this case also the payment should have been made by way of advance of loan to a shareholder of QNEI. The loan given by QNEI to the Assessee does not fall within the aforesaid provision. Also, in the decision of the Jurisdictional High Court in the case of Ennore Cargo Container Terminal (P.) Ltd. (supra) it is held that, even if common shareholders are there in both the companies, the deemed dividend can be taxed only in the hands of the registered shareholder of the company and not in the hands of the company which has received the loan. 7.2 However, the Bench took into cognizance the judicial precedents relied upon by the learned Counsel for the Assessee in support of his contentions. (a) The decision of the Hon'ble Delhi High Court in the case of the CIT v. Ankitech (P.) Ltd. [2011] 11 taxmann.com 100/199 Taxman 341/[2012] 340 ITR 14 wherein the Hon'ble Delhi High Court has held that the provisions of section 2(22)(e) of the Act is not attracted if the recipient is not a shareholder. (b) The decision of the Jurisdictional High Court in the case of CIT v. Checkpoint Apparel Labelling Solutions (India) Ltd. [2020] 120 ta....