TaxTMI 
TaxTMI 
2008 (11) TMI 273
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....was covered by the second limb of provisions of Section 2(22)(e) (in bold letters), relevant part of which reads: (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 or otherwise) (made after the 31st May, 1987, by way of advance or loan to a shareholder), being a person who is the beneficial owner of the 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 voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest.... According to the assessee, the shares were held in the names of three trustees for and on behalf of the trust, NNT and that the beneficiaries of the trust were five in number and none of the trustees were also beneficiaries of the trust. The assessee contended that to invoke the second limb of the provisions of Section 2(22)(e) the primary condition was that NNT must be both a registered shareholder and also beneficial shareholder. Since the trustees of NNT held the shares on behalf of the trust ....
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....nt for constitution of a Special Bench on the following questions: 1. Whether deemed dividend under Section 2(22)(e) of the IT Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender ? 2. Whether the words "such shareholder" occurring in Section 2(22)(e) refer to a shareholder who is both the 'registered' shareholder and the beneficial shareholder ? 8. The President by order dt. 10th Oct., 2007 has directed the hearing of the entire appeal and the two questions formulated as above for consideration by the Special Bench. 9. M/s Weaveland, Panipat, Haryana, have sought permission and were granted permission to appear as intervener before the Special Bench. The facts in the case of the intervener viz., Asstt. CIT v. Weaveland ITA No. 5036/Del/2008, are as follows : M/s Weaveland is a partnership firm. It had various transactions of receipts and payments of money with M/s Paliwal Industries (P) Ltd. (PIPL). There were four partners in the firm M/s Weaveland. These four partners held shares in PIPL, the details of which were as follows: 1. Mr. Avinash Chander Sharma 30% 2. Mrs. Rani Paliwal 27.50% 3. ....
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....)(e), the following are two conditions precedent for invoking Section 2(22)(e): (i) The shareholder should be a registered shareholder; and (ii) The shareholder should also be a beneficial owner of the shares. Thus, according to him the second question formulated for consideration by the Special Bench has to be answered as above. It was submitted by him that in the case of the assessee, the common shareholder was a trust. Share certificates are in the name of the trustees. Thus, the registered holders are the trustees, whereas the beneficial owners are the beneficiaries of the trust. The trustees and beneficiaries were different individuals. Hence, the primary condition for invoking Section 2(22)(e) is not fulfilled and consequently Section 2(22)(e) does not apply to the case of the assessee. 12. On the first question formulated for consideration by the Special Bench, according to him the same does not arise for consideration in his case but nevertheless, he relied on the decision of the Hon'ble Rajasthan High Court in the case of CIT v. Hotel Hilltop (2008) 217 CTR (Raj) 527, wherein it has been held by the Hon'ble Rajasthan High Court that deemed d....
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....hree situations have to be seen disjoint and not as interconnected. Situation (c) referred to above if read disjointly will apply even to payments to non-shareholders. (iii) According to him it is not correct to say that dividend is always linked to a payment by a company to its shareholders. In this regard he referred to the provisions of Section 8(a) of the Act which lays down that for the purposes of inclusion in the total income of an assessee any dividend declared by a company or distributed or paid by it within the meaning of Sub-cls (a) to (e) of Clause 22 of Section 2 shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be. It was submitted by him that by the aforesaid provisions a charge to tax in the hands of the non-shareholder is also possible. (iv) According to him the Hon'ble Rajasthan High Court in the case of Hotel Hilltop (supra) has not dealt with the second limb of Section 2(22)(e) of the Act and that case only dealt with the third limb of Section 2(22)(e) of the Act. 15. We have considered the rival submissions. The historical background of Section 2(22)(e) is as follows: ....
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....ection 2(22)(e) is as follows: Explanation 3 : For the purpose of this clause-- (a) "concern" means an HUF, or a firm or an AOP or a BOI 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 per cent of the income of such concern. 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 per cent of the voting power. 16. Under the 1922 Act, two categories of payments were considered as dividend viz., (a) any payment by way of advance or loan to a shareholder was considered as dividend paid to shareholder; or (b) any payment by any such company on behalf or for the individual benefit of a shareholder was considered as dividend. 17. In the 1961 Act, the very same two categories of payments were considered as dividend but an additional conditi....
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.... 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. 20. In the case of CIT v. C.P. Sarathy Mudaliar (supra), provisions of Section 2(6A)(e) of the Act, 1922, which was synonymous to Section 2(22)(e) of the IT Act, 1961 came up for consideration. In the said case, members of HUF acquired shares in a company with the fund of the family. Loans were granted to HUF and the question was whether the loans could be treated as dividend income of the family falling within Section 2(6A)(e) of the Act, 1922. The apex Court held that only loans advanced to shareholders could be deemed to be dividends under Section 2(6A)(e) of the Act; the HUF could not be considered to be a 'shareholder' under Section 2(6A)(e) of the Act and hence, loans given to the HUF will not be considered as loans advanced to "shareholder" of the company and could not, therefore, be deemed to be its income. The apex Court further held that when the Act speaks of shareholder it refers to the registered shareholder. 21. The aforesaid decision of the apex Court in the case of C.P. Sarathy M....
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.... additional condition under the 1961 Act. The word "shareholder" alone existed in the definition of dividend in the 1922 Act. The expression "shareholder" has been interpreted under the 1922 Act to mean a registered shareholder. This expression "shareholder" found in the 1961 Act has to be therefore construed as applying only to registered shareholder. It is a principle of interpretation of statutes that where once certain words in an Act have received a judicial construction in one of the superior Courts, and the legislature has repeated them in a subsequent statute, the legislature must be taken to have used them according to the meaning which a Court of competent jurisdiction has given them. 23. In the 1961 Act, the word "shareholder" is followed by the following words "being a person who is the beneficial owner of shares". This expression used in Section 2(22)(e), both in the 1961 Act and in the amended provisions w.e.f. 1st April, 1988 only qualifies the word "shareholder" and does not in any way alter the position that the shareholder has to be a registered shareholder. These provisions also do not substitute the aforesaid requirement to a requirement of merely holding a b....
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.... power. This is because of the expression "such shareholder" found in the relevant provision. This expression only refers to the shareholder referred to in the earlier part of Section 2(22)(e) viz., a registered and a beneficial holder of shares holding 10 per cent voting power. The Hon'ble Rajasthan High Court in the case of Union of India us. Wazir Singh AIR 1980 Raj 252, while dealing with an expression "no such application" in the context of Rule 97 of the Rajasthan High Court Rules, 1952 has held as follows: Generally the word 'such' refers only to previously indicated, characterized or specified. 'Such' is an adjective meaning, the one previously indicated or refers only to something which has been said before. The Hon'ble Allahabad High Court in the case of Mohan Lal and Anr. v. Grain Chambers Ltd. AIR 1959 All 279 has held as follows: In fact, it appears to us that the word 'such' is used before a noun in a latter part of a sentence, the proper construction in the English language is to hold that the same noun is being used after the word 'such' with all its characteristics which might have been indicated ea....
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.... encumbrancer or different kinds of encumbrances. Therefore, the first requirement of holding of shares both as a legal registered owner and beneficial owner of such shares is not satisfied in the case of the assessee. Therefore, provisions of Section 2(22)(e) would not be applicable at all to the case of the assessee. 28. The answer to the second question referred to the Special Bench is that the expression 'shareholder' referred to in Section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of Section 2(22)(e) will not apply. Similarly, if a person is a beneficial shareholder but not a registered shareholder then also the provisions of Section 2(22)(e) will not apply. 29. In view of the fact that the assessee was not holding beneficial interest in shares of BPCL and UPPL, there is no requirement of answering the first question that arises for consideration in the case of the assessee viz., as to whether deemed dividend under Section 2(22)(e) of the IT Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender ? How....
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....d by the Tribunal. On Revenue's appeal before the Hon'ble High Court, the following question of law was framed for consideration: Whether on the facts and in the circumstances of the case and in law, the learned Tribunal was justified in upholding the order of learned CIT(A) deleting the addition of Rs. 10 lakhs as deemed dividend under Section 2(22)(e)of the IT Act ? The Hon'ble Court held as follows: The 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 concerned firm. In which event, it would fall within the expression 'deemed dividend'....
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.... to be borne in mind that the tax can only be assessed in the hands of right person as held by the apex Court in the case of ITO v. Ch. Atchaiah (1996) 130 CTR (SC) 404 : (1996) 218 ITR 239 (SC), at pp. 243-244. 13. In order to find out the right person, one has to examine the charging provisions of the Act. Sections 4 and 5 of the Act are the charging provisions.... Thereafter, the Tribunal has referred to the provisions of Section 5(1) of the Act and has concluded that income accrues to the person who is the recipient of the payment from the company. The Tribunal has thereafter referred to Circular No. 495, dt. 22nd Sept., 1987 of the CBDT wherein it has been opined that deemed dividend would be taxed in the hands of a concern (non-shareholder) also if the conditions mentioned in the section are satisfied. 34. We are of the view that the provisions of Section 2(22)(e) do not spell out as to whether the income has to be taxed in the hands of the shareholder or the concern (non-shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of Section 2(22)(e) of the Act. 35. The intention behind enacti....
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....on can be applied only in the hands of the shareholder and not the non-shareholder viz., the concern. 37. The definition of dividend under Section 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 the term "dividend" can be said to operate. If the definition of "dividend" is extended to a loan or advance to a non-shareholder, the ordinary and natural meaning of the word "dividend" is taken away. In the light of the intention behind the provisions of Section 2(22)(e) and in the absence of indica....