TaxTMI 
TaxTMI 
2024 (4) TMI 320
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....eals is in respect of addition made by the Ld. AO and confirmed by the Ld. CIT(A) towards deemed dividend u/s. 2(22)(e) of the Act for the sum received by the assessee from another group company. We take ITA No. 987/Kol/2023 to draw the facts of the case. Our observations and findings in this respect will apply mutatis mutandis to the other appeal in ITA No. 988/Kol/2023. 4. Brief facts of the case are that assessee filed its return of income on 30.09.2013, reporting total loss of Rs.2,16,59,610/-. Assessee is engaged in the business of Brand Owning and Consultancy. During the year under consideration, assessee Apeejay Surrendra Management Services Pvt. Ltd. (in short "ASMSPL") received a sum of Rs.5,50,11,501/- as loans/advances from another group company called as Apeejay Private Ltd. (in short "APL"). Assessee is not a registered shareholder of APL who is a lender company. However, there is a common shareholder namely, Kathua Steel Works Pvt. Ltd. (in short "KSWPL") who holds substantial interest in both the assessee and the lender company. Details of common shareholding by KSWPL in the two companies is as under: (i) KSWPL holds 99.96% shares in APL (lender), ....
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....ng fiction which should receive strict construction. According to him, in construing a legal fiction, it will be proper and necessary to assume all those facts on which alone the fiction can operate. While construing the fiction, it cannot be extended beyond the purpose for which it is created. The legal fiction has to be carried to its logical conclusion and must be within the framework for the purpose for which it is created. 5.2. Ld. Counsel placed reliance on the decision of Special Bench, Mumbai ITAT in the case of ACIT Vs. Bhaumick Colour Pvt. ltd. (2009) 118 ITD 1 (Mum)(SB) wherein it was 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 the person, other than a shareholder. Ld. Counsel also referred to the decision of Hon'ble High Court of Delhi in the case of CIT Vs. Ankitech Pvt. Ltd. (2011) 340 ITR 14 (Del.) wherein Hon'ble Court held that the assessee who is not a shareholder of the company from which he received a loan or an advance cannot be treated as being covered by the definition of the word dividend u/s. 2(22)(e) of the Act. He further made an attempt to distinguish the de....
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....SWPL is also a shareholder/member of the assessee company and having substantial interest. 6. We have heard the rival contentions and perused the material available on record and have also given our thoughtful consideration to the written submission and case law compilations placed before us. The sole issue under consideration before us is whether Ld. CIT(A) erred in confirming the action of ld. AO who considered the loan of Rs.5,50,11,501/- received from APL as deemed dividend u/s. 2(22)(e) of the Act. Before delving on the moot point referred above, we apprise ourselves with the relevant provisions contained in the Act u/s. 2(22)(e) which is extracted below. "2(22)(e) - 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 31st day of May, 1987, by way of advance or loan 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, or to any concern in....
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....s would not distribute such profits 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, such 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 such payments as dividend. To meet this objective, the definition of 'dividend' was expanded to include such transactions of payment of loans/advances which otherwise are not in the nature of 'income' under the Act. 7.1. The basis of bringing amendment to section 2 (22)(e) by the Finance Act, 1987 w.e.f. 01.04.1988 was to ensure that persons who controls the affairs of the company as well as that of a concern and for the payment made to a concern from the company and the person who can control the affairs of the concern and draw the same from the concern instead of the company directly makin....
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....contained in section 2(32) of the Act, the beneficial ownership of shares is with KSWPL. 8.1. Keeping the intention in mind while enactment of section 2(22)(e), the present transaction of loan/advance given by APL to the assessee, both having a common shareholder KSWPL per se falls within the mischief of second limb of section 2(22)(e) whereby the assessee is the 'concern'(ASMSPL) to whom a loan has been granted by the 'company'(APL) in which 'such shareholder'(KSWPL) has a beneficial interest. The question before us in the present appeal is as to in whose hands the taxability arises, once caught within the mischief of section 2(22)(e) of the Act. 9. To arrive at a conclusion to bring legal fiction to a logical conclusion as contained in section 2(22)(e), we need to look into the relevant provisions contained in the Companies Act, 2013 to have a proper perspective and understanding of the terms dividend, member, voting right so as to understand the concept of beneficial ownership, creating a charge of income-tax, in accordance with section 5 of the Act. 9.1. When we look at the provisions of the Companies Act, 2013, relevant provisions are extracted as under: (a) ....
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....n respect of such capital, have a right to vote only on resolutions placed before the company which directly affect the rights attached to his preference shares and, any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital and his voting right on a poll shall be in proportion to his share in the paid-up preference share capital of the company: (d) 51. Payment of dividend in proportion to amount paid-up.- A company may, if so authorised by its articles, pay dividends in proportion to the amount paid-up on each share. 10. From the above stated provisions of the Companies Act, 2013, the controlling position is achieved by having certain threshold percentage of voting power which in turn accrues to a member of a company as a right on account of being member of a company. For being a member of a company, a person has to hold shares whose name is entered in the register of members of the company or whose name is entered as a beneficial owner in the records of the depository. 10.1. In the case of a company limited by shares, the liability of its members is limited to the extent of amount paid on the shares ....
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....The relevant observations and findings arrived at by the Hon'ble Apex Court is extracted as under: "15. This then brings us to the Division Bench judgment in the present case. In para 17, after referring to various judgments referred to by us hereinabove, the Division Bench posed two questions to be answered by it as follows: "(1) To attract the first limb of Section 2 (22) (e) of the Act, is it necessary that the person who has received the advance or loan is a shareholder and also beneficial owner. To put it otherwise, whether both the conditions are required to be satisfied will depend upon the interpretation to be given to the words "being a person who is a beneficial owner of shares" which was inserted by amendment in the aforesaid provision carried out by the Finance Act, 1987 w.e.f 1st April, 1988. (2) Whether the assessee who is a partnership firm can be treated as 'shareholder' because of the reason that it has purchased the shares in the name of the two partners." 16. It answered the first question by stating that the expression "being a person who is a beneficial owner of shares" would be in addition to the shareholder first be....
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....who can compel the registered owner to vote in a particular way, as has been held in a catena of decisions starting from Mathalone v. Bombay Life Assurance Co. Ltd. [1954] SCR 117. 19. This being the case, we are prima facie of the view that the Ankitech (P.) Ltd. case (supra) itself requires to be reconsidered, and this being so, without going into other questions that may arise, including whether the facts of the present case would fit the second limb of the amended definition clause, we place these appeals before the Hon'ble chief Justice of India in order to constitute an appropriate Bench of three learned judges in order to have a relook at the entire question." 11.1. At the outset, we note that in this decision, the Hon'ble Court has placed the appeals before the Hon'ble Chief Justice of India to constitute appropriate bench of (3) Ld. Judges to have a relook at the entire question. Further, we note that in para 18, Hon'ble Court observed that shareholder now, post amendment, has only to be a person who is the beneficial owner of shares. According to the Hon'ble Court, the moment there is a shareholder, who need not necessarily be a member of the company on its re....